Quay Park Arena Management Ltd v Great Lakes Reinsurance (UK) PLC
[2014] NZHC 2204
•11 September 2014
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2013-404-5262 [2014] NZHC 2204
BETWEEN QUAY PARK ARENA MANAGEMENT LIMITED
Plaintiff
AND
GREAT LAKES REINSURANCE (UK) PLC
Defendant
Hearing 7 July 2014 Appearances
Mr D Connor and Mr J Mangal for the Plaintiff
Mr M G Ring QC and Mr S Stokes for the DefendantJudgment
11 September 2014
JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE
This judgment was delivered by me on
11.09.14 at 4 pm, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
QUAY PARK ARENA MANAGEMENT LIMITED v GREAT LAKES REINSURANCE (UK) PLC [2014] NZHC 2204 [11 September 2014]
Background
[1] The plaintiff, QPAM Limited, in this proceeding seeks summary judgment against the defendant, Great Lakes Reinsurance (UK) PLC.
[2] On 21 May 2004 the plaintiff entered into a Development Agreement (“Development Agreement”) with Auckland City Council. In terms of that agreement the plaintiff agreed to design, construct, commission and maintain what is now the Vector Arena. The Development Agreement made provision for the appointment by the plaintiff of an engineer. Mr K J Milroy was that engineer at the time of the relevant events.
[3] On 25 May 2004, in order to meet its obligations under the Development Agreement, the plaintiff entered into a design and construction contract (“the DACC”) with Mainzeal Construction Limited (“Mainzeal”) the contractor chosen to design, construct, commission and maintain the Vector Arena under contract to the plaintiff. Included in the DACC was a provision requiring Mainzeal to provide a performance bond. The agreed contract price that would be paid to Mainzeal was approximately $72.3 million.
[4] On or about 31 May 2004, the defendant, pursuant to an agreement with Mainzeal which authorised and required it to do so, entered into a performance bond with the plaintiff. The defendant agreed to pay the plaintiff on demand the sum of
$3,337,072. The parties do not dispute that the performance bond conformed to the requirements of the DACC provisions under which Mainzeal was obliged to provide the performance bond.
[5] Throughout this judgment, I will refer to parties in the same position as the defendant as the “bond issuer”. Parties that have the benefit of a performance bond, such as the plaintiff in this case, I will refer to as the “principal”. Parties that are in the position of Mainzeal, I will refer to as the “contractor”.
[6] The meaning and effect of the provisions of the performance bond deed, entered into between the plaintiff and the defendant, is at the heart of the present dispute and further reference to the terms of the deed will be made later in this
judgment.
[7] According to the plaintiff, Mainzeal defaulted in its performance under the DACC in 2007. Disputes arose between the plaintiff and Mainzeal and to settle those, a deed of variation and settlement was entered into (“DVS1”). That deed had the objective of providing a way to make progress towards completion of the project. Further disputes arose between the plaintiff and Mainzeal and in 2008 they entered into a further deed of variation and settlement which became known as “DVS2” which will be discussed shortly.
[8] In consideration for entering into DVS2, Mainzeal agreed to desist in its dispute resolution proceedings which it had by then commenced. The provisions of DVS2 are of importance in the context of the present dispute between the parties.
The terms of DVS2
[9] The plaintiff submits the following are the principal terms of DVS2:
a) Section 5 which provided that DVS2 supersedes the earlier Deed of
Variation and Settlement.
b) Clause 7.1 which provided:
The Principal and the Contractor agree that Completion of the Contract Works will be achieved by the Contractor achieving Completion of all items, including but not limited to all defects and omissions, set out in Annexure A to this deed (Completion Works) for no additional payment and to the satisfaction of the Engineer under clause 7.4 of this deed.
(c) Clause 7.4 which provided that when Mainzeal believed it had achieved completion of the Completion Works, it was required to notify the Plaintiff and the Engineer in writing and obtain a certificate from the Engineer.
(d) Clause 7.6 which provided that Mainzeal’s liability for defects or omissions in the Contract Works (as opposed to the Completion Works) would continue. It reads as follows:
If any defects or omissions in the Contract Works, which are not part of the Completion Works arise prior to certification of Completion of the Completion Works, then these defects or omissions will be dealt with separately from the Completion Works and will not be relevant to or prevent certification of Completion of the Completion Works.
(e) Section 8 acknowledged Mainzeal is liable for liquidated damages and other matters bearing on the programme of the Works.
(f) Section 9 dealt with the payment of balance of the contract price.
(g) Clauses 10.1 dealt with the status of the bond at the centre of this claim. It provided:
Within 5 Working Days after the date of issue of the Certificate of Completion of the Completion Works under clause 7.4 above, the Principal will exchange with the Contractor the Contractor’s bond to the value of $3,337,072 with a replacement bond on the same terms and conditions in the sum of $300,000 as security for the Contractor’s performance of its obligations (if any) during the Period of Defects Liability described in clause 7.7 of this deed.
[10] While I accept that the summary provides an accurate outline of the main relevant provisions of DVS2, some additional consideration will need to be given to that document below.
Events subsequent to DVS2
[11] On or about 28 February 2013, Mainzeal went into liquidation and the plaintiff gave Mainzeal (through its liquidators) notice to remedy its defaults. No Certificate of Completion was ever issued as contemplated by DVS2.
[12] On 31 May 2013 at the request of the plaintiff, the engineer under the contract, Mr Milroy, provided to the plaintiff a report setting out “the current status of Works currently classified as ‘Defects’ on the Project”. Mr Milroy attached to his report what he described as a schedule which tabled the “Outstanding Defects” and the remedial works required. He noted that, “the extent of remedial Works has not been fully designed”. Further, he had obtained the advice of a quantity surveyor about the likely costs involved in that design. The letter/report then stated:
Given this, then I can certify that the likely costs that QPAM will incurr to
remedy these “Defects” will not be less than ... $5,344,118 excluding GST.
[13] The schedule which was attached comprised 22 main items with sub items listed under them with the document running to four pages in length. The total amount of the estimate to remedy the defective works was stated to be $6,145,736 which is apparently the figure in the previous paragraph, inclusive of GST.
[14] On 25 July 2013, the plaintiff through its General Manager Brendan Hines,
delivered a letter of demand in accordance with the performance bond to the defendant. While there was apparently more than one demand issued, that dated 25
July 2013 provides the substance of the demand which the plaintiff made and which is the basis for the current claim. In the demand, the entire amount payable under the bond of $3,337,072 was claimed. It was stated that:
Mainzeal remains responsible under the [DACC] for the cost of outstanding rectification and remediation of various defective works.
[15] Further, the demand mentioned Mr Milroy’s report dated 31 May 2013 and referred to cl 3.1 of the DACC which entitles the plaintiff to make demand upon, and utilise the bond to pay for the remedial costs which the engineer certifies that the plaintiff would incur by reason of Mainzeal’s breach of the DACC.
[16] On 2 August 2013, Vero responded on behalf of the defendant stating that they had concerns about the demand. The plaintiff submits that the concerns were:
(a) The demand sought payment for work not within the scope of the
Performance Bond;
(b) The demand sought payment for items of work which Vero claimed
had been “signed off” by the Engineer or the Independent Reviewer;
(c) The demand did not meet the terms of the Performance Bond because the accompanying Engineer’s Certificate was not “the sole” opinion of the Engineer; and
(d) The demand required payment to be made into a bank account which is maintained by the Plaintiff in the joint names of the Plaintiff and the Auckland Council as required by clause 5 of the Performance Bond.
[17] In an attempt to address some of the concerns which the defendant had expressed, the plaintiff issued a second demand for payment under the performance bond on 7 August 2013. However the defendant declined to comply with the demands. The plaintiff thereafter issued summary judgment proceedings which pleaded that the defendant was liable under the performance bond and that demand had been made but had not been met. The plaintiff sought judgment in the sum of
$3,337,072.
[18] A notice of opposition was filed which broadly reflects the objections which had been stated by the defendant in the exchange of correspondence between the
parties. The notice of opposition relevantly states:
2.1The demand seeks payment in respect of matters not secured by the Bond (i.e. works which are not “Completion works” as defined in the Deed of Variation and Settlement dated 9 September, 2008 between the plaintiff and Mainzeal Property and Construction Limited);
2.2.The demand seeks payment in respect of items of work which have previously been signed off by the Engineer or the Independent Reviewer;
2.3The plaintiff’s purported “demand” on the Bond does not meet the terms of the Bond as:
(a) The sum demanded and certified in the Engineer’s certificate was not “in the sole opinion of the Engineer reasonable” as:
(i) It does not reflect the Engineer’s sole opinion;
(ii) The Engineer could not reasonably have formed the opinion that the alleged defects fell within the terms of the Bond and consequently that the resulting remedial costs (the sum demanded) was reasonable;
(iii) The sum certified by the Engineer is substantively incorrect and consequently the Engineer’s certificate
is incorrect and unreasonable.
…
Principles of summary judgment
[19] Under r 12.2 of the High Court Rules, the plaintiff is required to satisfy the Court that a defendant has no defence to a cause of action in the statement of claim or to a particular part of a cause of action. The applicable principles are well settled and are set out by the Court of Appeal in Krukziener v Hanover Finance Ltd:1
The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried. The Court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated. The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as for example where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable. In the end the Court's assessment of the evidence is a matter of judgment. The Court may take a robust and realistic approach where the facts warrant it.
1 Krukziener v Hanover Finance Ltd [2008] NZCA 187, (2008) 19 PRNZ 162 at [26] per Miller J (citations omitted).
[20] I intend to be guided by this statement.
Issues
[21] There are two main issues which the defendant says are in contention in this proceeding. They are as follows:
a) Whether QPAM agreed or promised that following the execution of DVS2, the performance bond only secured due performance of “Completion Works” under DVS2 and as a result QPAM’s demand and/or engineer’s certificate is invalid and the amount demanded is not payable and;
b)Additionally or alternatively, did the engineer fail to validly exercise his contractual discretion in issuing the certificate and as a result, QPAM’s demand and the engineer’s certificate are both invalid and the amount demanded is not payable.
[22] This statement of the issues provides a useful framework to approach the matters that need to be decided in this judgment.
Parties’ submissions on the first issue
[23] It is the submission of Mr Michael Ring QC, counsel for the defendant, that a recognised defence to a demand under a performance bond becomes available where the party making demand has relevantly promised not to do so. In the context of this case, it is submitted that the plaintiff agreed or promised that the performance bond would only secure due performance of “Completion Works” under DVS2.
[24] The defendant submits that the engineer’s certificate included items that did not fall within the Completion Works. The certificate therefore was inconsistent with the promise that was given when the plaintiff and Mainzeal entered into DVS2.
[25] This defence is described by Mr Ring not as an exception, but as an overriding rule. The essence of Mr Ring’s submission is that it is a matter of ascertaining the common intention of the parties, having regard to the words they
used and the context in which they used them. It is said that by virtue of DVS2, Mainzeal’s obligations under the DACC were varied. Mr Ring submits that the plaintiff and Mainzeal relevantly agreed that:
(a) Completion of the Contract Works would be achieved by Mainzeal achieving Completion of all items set out in Annexure A to DVS2, which were defined as the “Completion Works”;
(b) Any defects in the Contract Works which were not part of the Completion Works and which arose prior to Completion of the Completion Works, were to be dealt with separately from the Completion Works and were not to prevent Completion of the Completion Works;
(c) The Bond would apply to the due performance and completion of the Completion Works, and would be discharged on the issue of a Certificate of Completion for the Completion Works.
[26] It was the contention of the defendant that in recognition that the performance bond was limited to the Completion Works, and was to come to an end at the completion of the Completion Works, Mainzeal, the plaintiff agreed that a replacement bond in the sum of $300,000 would be provided as security for Mainzeal’s performance of its obligations (if any) following completion of the Contract Works.
[27] The defendant says that the plaintiff freely agreed to restrict Mainzeal’s obligations, and consequently the scope of the performance bond, in this way. The plaintiff also received valuable consideration in return as Mainzeal agreed to discontinue the adjudication proceedings which it had commenced against the plaintiff under the Construction Contracts Act 2002.
[28] The defendant submits that it has given unchallenged evidence regarding the scope of the performance bond, DVS2, and those items which it says fall within the definition of Completion Works. The defendant submits that consequently, for the purpose of the summary judgment application, the Court must assume that the relevant facts include that the plaintiff has made demand in respect of alleged defects not falling within the Completion Works, namely, alleged defects:
a)In the previous contract works which the parties did not include in the Completion Works in DVS2;
b)In variations to the original contract which the parties did not include in the Completion Works in DVS2;
c) Which actually fall within the plaintiff's maintenance obligations;
and
d)In works that Mainzeal was not required to do under the original contract.
[29] The position for the plaintiff is that it is not open to the Court when considering a claim on the performance bond to go into issues about the extent of Mainzeal’s liability to the plaintiff whether under the DACC or DVS2. The Court should look no further than the fact that the engineer to the contract has certified that he considers that the plaintiff has a proper claim under the performance bond against the defendant.
[30] The plaintiff submits that even if the defendant is correct, it does not follow that the claim by the plaintiff is necessarily misconceived. That is because of the peculiar nature of performance bonds that it is not necessary for the plaintiff to establish that it can prove claims against Mainzeal which are covered by the performance bond as a condition of making a claim under the bond. Further, the question remains open whether a party in the position of the defendant can resist a claim under the performance bond on the basis that subsequent dealings between the plaintiff and Mainzeal included an implied promise that the plaintiff would no longer rely on the performance bond in regard to possible contractual claims that it might have had under the DACC.
Analysis of the first issue
[31] The first issue to be dealt with is the contention that the provisions of the construction contracts and the performance bond deed included a qualification of the right to call on the undertaking contained in the performance bond. Whether or not such a term can be implied may be irrelevant if the plaintiff’s submission is accepted that the only thing that matters is that the engineer has certified that the amounts claimed are owing. I will deal with that aspect of the argument first. This part of the
case involves analysis of the effect that the issue of a valid engineer’s certificate would have on the rights of the parties. I put to one side for the moment the question of the validity of the certificate which will be examined in the second part of this judgment.
Case law authorities
[32] There have been numerous reported cases in which the special character of performance bonds has been recognised. It is sufficient to mention only two of them. First there is the well known dictum of Lord Denning in Edward Owen Engineering Ltd v Barclays Bank International Ltd:2
[T]he 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 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.
[33] In a later case, the High Court of Australia in Wood Hall Ltd v Pipeline Authority explained the position in similar terms.3 The attitude of the courts to interfering with the obligations of a bond issuer was set out. The Court stated that where there is an unconditional undertaking on the part of the bank (the bond issuer) to pay in terms of the guarantee (and the bond at hand contains such a provision which I will discuss subsequently), the bank is not entitled to decline the demand and
enquire into the rights of the principal and the contractor under the contract to which the bank is not a party. To make such inquiries would be to depart from the ordinary meaning of the undertaking that the bank is to pay on demand.4 It was also said that where the performance bond contains express words which are unqualified in their terms, any entitlement on the part of the bank to enquire into disputes between the parties to the construction contract is precluded. Such a qualification would have the
effect of depriving the bond of the quality which gives it commercial currency. As
2 Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159 (CA) at 171.
3 Wood Hall Ltd v Pipeline Authority (1979) 141 CLR 443 (HCA).
4 At 451 per Gibbs J.
Steven J put it:5
Once a document of this character ceases to be the equivalent of a cash payment, being instantly and unconditionally convertible to cash, it necessarily looses acceptability. Only so long as it is “as good as cash” can it fulfil its useful purpose of affording to those to whom it is issued the advantages of cash …
[34] There is also authority to the effect that: 6
… the Court should have regard to previous decisions of the Courts upon the same or similar wording. Parties to a commercial contract are to be taken to have contracted against a background which includes the previous decisions upon the construction of similar contracts.
[35] Therefore, the observations set out in the preceding paragraphs need to be kept in view when construing the contract that the parties entered into in this case.
[36] I also respectfully agree with the remarks in Clough Engineering Ltd v
Natural Gas Corp Ltd that:7
Notwithstanding the importance of commercial practice, the statements in these authorities do not suggest that the Court should depart from the task of construing the terms of the contract in each case. What the authorities emphasise is that the commercial background informs the construction of the contract. In particular … the Court ought not to readily favour a construction which is inconsistent with an agreed allocation of risk as to who is to be out of pocket pending resolution of the dispute about breach.
[37] It was held in Clough that the principal in that case could invoke the performance bond even if the claimed breach was genuinely disputed.8
The circumstances in which the Court will restrict enforcement of a performance bond
[38] Clough recognised three exceptional circumstances in which the court could conclude that the bond issuer should not be required to perform its obligation to
make payment:9
5 At 457.
6 Toomey v Eagle Star Insurance Co Ltd [1994] 1 Lloyd’s Rep 516 (CA) at 520 per Hobhouse J.
7 Clough Engineering Ltd v Natural Gas Corp Ltd [2008] FCAFC 136, (2008) 249 ALR 458 at
[82].
8 At [100].
9 At [77].
First – the court will enjoin the party in whose favour the performance
guarantee has been given from acting fraudulently …
Second – the party in whose favour the performance bank guarantee has been given may be enjoined from acting unconscionably in contravention of s 51AA of the TPA …
[39] This second exception has particular relevance to Australia and empowers the Australian courts to restrain the principal from acting unconscionably for the purposes of the Trade Practices Act 1974 (Cth). Then the Court came to the third exception:10
Third - the most important exception for present purposes, is that, whilst the court will not restrain the issuer of a performance guarantee from acting on an unqualified promise to pay (Reed Construction Services at 164 per Austin J):
... If the party in whose favour the bond has been given has made a contract promising not to call upon the bond, breach of that contractual promise may be enjoined on normal principles relating to the enforcement by injunction of negative stipulations in contracts.
It may be preferable not to describe this as an exception but rather as an over-riding rule because it emphasises that the "primary focus" will always be the proper construction of the contract …
[40] This third exception is at the heart of the defendant’s case that there was a promise in this case which the plaintiff made to Mainzeal not to call upon the performance bond for works that do not fall under the “Completion Works” category.
[41] Additional reference is required to observations of the Court in, Reed
Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd11 and Clough.
[42] Reed held that a line of cases has recognised the principle stipulated in the third exception above.12 Reed was in turn was based on remarks in Wood Hall Ltd
and a New South Wales Supreme Court decision in Pearson Bridge (NSW) Pty Ltd v
10 At [77].
11 Reed Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd (1999) 15 BCL 158 (NSWSC).
12 At 164.
State Rail Authority of NSW.13
[43] Austin J concluded in Reed that it was relevant to consider the wording of the construction contract when determining whether the principal in that case was entitled to claim under the performance bond. Because the building contract gave rise to the obligation on the part of the contractor to obtain a performance bond, regard could be had to its terms to determine in what circumstances the principal could make a claim under the performance bond. The building contract included a provision that the securities which the contractor was required to provide “shall be available” to the principal in two circumstances. The argument for the bond issuer was that for various reasons the principal did not have an entitlement to the payment of monies and therefore the principal could not call on the performance bond. An interlocutory injunction was issued to prevent the principal from making or continuing a demand under the performance bond.
[44] In Clough, the decision in Pearson Bridge, amongst others, was considered by the Federal Court. The court accepted that the provisions of the construction contract may qualify the right to call on the undertaking contained in the performance bond. On the other hand, it was also noted, it would seem with approval, certain propositions which were adopted in Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd about the nature of performance bonds.14 These propositions are in regard to the two general commercial reasons why a principal of the performance bond may have wanted to have such a bond in place:15
One is to provide security for a valid claim against the contractor. The second, which is additional to the first, is to allocate the risk between the parties as to who shall be out of pocket pending the resolution of the dispute between them.
[45] I interpolate that the second reason would seem to reflect an intention that the contractor should pay first and litigate later. The performance bond mechanism would assist such an outcome because once a claim is made on the bond issuer (whether or not disputed by the contractor), the bond issuer would pay out and then
recover from the contractor. The contractor would thereafter, if so minded, be
13 Pearson Bridge (NSW) Pty Ltd v State Rail Authority of NSW [1982] 1 ACLR 81 (NSWSC).
14 Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812 (VSC).
15 Clough, above n 7, at [79].
required to take proceedings to recover the amount that it had paid to settle the liability to the bond issuer. This function was described in Clough as being that of a “risk allocation device”.16
[46] It is consistent with such an approach to adopt a construction of the contractual arrangements that favours enforcement of the performance bond without reference to underlying contractual obligations which may become relevant at a later stage after the obligations under the performance bond have been performed. Putting it another way, the interpretation leans against a construction which defers performance under the bond until there has been litigation between the contractor and the principal. The certificate of the engineer provisionally at least resolves the rights of the parties at this stage.
[47] The Court in Clough also noted, again with apparent approval, another passage from Fletcher Construction:17
Remembering that we are speaking of guarantee in the sense of standby letters of credit, performance bonds, guarantees in lieu of retention moneys and the like, the latter purpose [that of risk allocation] is often present and commercial practice plays a large part in construing the contract. No implication may be made that is inconsistent with an agreed allocation of risk as to who shall be out of pocket pending resolution of a dispute and clauses in the contract that do not expressly inhibit the beneficiary from calling upon the security should not be too readily construed to have that effect. As I have already indicated, they may simply refer to the kind of default which, if it is alleged in good faith, enables the beneficiary to have recourse to the security or its proceeds.
[48] The Australian line of authority including Clough does not appear to have been considered and applied in the United Kingdom or in New Zealand.
Important terms of the performance bond in this case
[49] While the decided cases provide some guidance on the operation of performance bonds, in every case it is necessary to construe the contract that the parties entered into. In determining the scope of the performance bond, normal principles of contractual interpretation will be applied. That undertaking must be
completed before it can be determined whether the plaintiff has negatived the
16 At [79].
17 At [79], quoting from Fletcher Construction, above n 14, at 827.
existence of an arguable defence. What matters can or cannot qualify as arguable defences will differ according to the interpretation that is given to the performance bond deed.
[50] The following provisions of the performance bond deed appear to me to be relevant to an understanding about the contractual intentions of the parties.
[51] In the introduction section of the deed, the purpose of the bond is stated “to ensure the due, proper and punctual performance by Mainzeal of its obligations under the Design and Construction Contract.” This provision in isolation could be viewed as indicating that the parties intended a type of surety where the liability is conditional upon proof that the contractor has breached the contract.
[52] There follows a section on which the obligations of the defendant are described as being the following:
The Bond Provider irrevocably and unconditionally undertakes, as primary obligor to pay to the Principal any sum or sums which may, from time to time, be demanded in writing by the Principal, up to an amount not exceeding in aggregate NZ$3,337,072 …
[53] The first point that emerges is that language of this kind has traditionally been viewed as pointing to an obligation to pay without the need to first prove that there has been a breach of the contractual obligations of one of the primary contracting parties to which the performance bond relates.18
[54] The inclusion of a provision stating that the bond is unconditional is of considerable significance. A bond drafted in the form of the one in the present case has been described by O’Donovan and Phillips in The Modern Contract of Guarantee as having the following characteristics:19
Drafted in this way, unconditional performance bonds are analogous to letters of credit or even promissory notes payable on demand. They are to be treated as the equivalent of cash. Apart from the making of the demand (and subject to certain exceptions discussed below) no further qualification is imposed upon the entitlement of the beneficiary to call upon the bond.
18 See the discussion of Wood Hall Ltd above.
19 James O’Donovan and John Phillips The Modern Contract of Guarantee (2nd ed, Sweet & Maxwell, London, 2010) at [13-12] (footnotes omitted).
Generally no term will be implied that a breach of the underlying contract is required before the bond can be called in, and the need for clarity and certainty limits the scope for any implied term. It is now clear, despite earlier doubts, that the relationship between the bank and the proprietor pursuant to an unconditional performance bond is not one of suretyship, which reinforces the view (subject to the following discussion) that a performance bond operates independently of the underlying transaction.
[55] I interpolate that it hardly needs to be added that there are exceptions to this approach including recognition that fraudulent claims are regarded as an exception: see Clough.20
[56] The wording used here, “irrevocably and unconditionally”, is a very widely drawn phrase. There are of course some conditions which the plaintiff has to comply with, such as the giving of notice which will be considered subsequently. Subject to that, there seems to be little room for a conclusion in light of the words quoted, to import an unwritten condition into the contract to the effect that the plaintiff would, as a precondition to demand under the bond, have to demonstrate that there has been a breach of the construction contract resulting in loss to it.
[57] The next significant passage in the performance bond deed is the statement that:
The Bond Provider will make payment forthwith upon demand by the Principal, without enquiry as to, and without having regard to, the position as between Mainzeal and the principal … save that such demand shall be accompanied by a certificate from the Engineer certifying that Mainzeal is in default under the Design and Construction Contract, has failed to remedy such default following reasonable notice to do so (which shall not exceed 10 days) and that the sum demanded is in the sole opinion of the Engineer reasonable.
[58] The provision that the defendant will make payment upon demand is consistent with the assimilation of performance bonds to other cash type instruments.
[59] So too is the paragraph in the performance bond deed which provides:
2.Liability: For the avoidance of doubt, the undertaking contained in clause 1 is unconditional and irrevocable and the Bond Provider’s liability hereunder shall not be impaired or discharged:
20 Clough, above n 7, at [77].
a)by reason of any indulgence, forgiveness or forbearance whatsoever by or on the half of the Principal in relation to the Design and Construction Contract.
[60] Sub paragraphs (a) – (g) are then set out after this main paragraph headed “liability”, to provide circumstances where the liability will remain intact. These include where the underlying obligation contained in the DACC has altered with the contract providing that the liability will not be impaired or discharged by “variation to or amendment of the [DACC]”.
[61] While there is Australian authority which has prevented the principal from taking steps to enforce the performance guarantee in the absence of established default on the part of the contractor under the underlying contract, the authorities in that jurisdiction emphasise that “clear words will be required to support the construction which inhibits a beneficiary from calling on a performance guarantee
where breach is alleged in good faith, that is, non-fraudulently”.21
[62] Clough can be regarded as containing an orthodox statement of the position. The statement of principle noted above in that case is fatal to the contentions that proof of breach is required. In the absence of “clear words”, the performance bond here leaves no room for the Court to inquire and be satisfied of default on the part of the contractor as a pre-requisite to finding that the bond issuer is liable to pay under the bond.
[63] In addition, it would appear that the reference to payment being due “without having regard to, the position as between Mainzeal and the Principal” means that questions of any alleged breach of contract are not to be enquired into. The purpose of such a provision would seem to deprive the defendant of the right to decline to make payment on the grounds that there was a dispute of substance as to whether the contractor was in fact in default under the DACC with the position being that the defendant was not required to pay until a binding agreement for determination of the question of breach had been resolved. Mr Ring, on behalf of the defendant, did not put forward any competing explanation as to why the words I have quoted at the
head of this paragraph were included in the performance bond deed.
21 Clough, above n 7, at [83].
[64] The presence in the clause of the phrase "without enquiry" excerpted above seems to correspond with the remarks of Lord Denning in Edward Owen Engineering Ltd quoted above at paragraph [32].
[65] The next part of the performance bond under consideration which needs to be examined is that which imposes the requirement for a certificate from the engineer that Mainzeal is in default. This would seem to represent a type of “halfway house” in that the requirement provides some protection against claims being made against the performance bond in circumstances where the plaintiff has suffered no loss. I accept that the inclusion of such a provision means that it cannot be said that the performance of the contractor under the DACC was a matter that was entirely separate from, and independent of the performance bond. However the fact that it was included does not mean that the door is thereby opened to an unlimited enquiry into the question of whether the contractor was or was not in breach of the multifarious obligations that it assumed under the DACC. Unless there is some assurance that the claim is a proper one, the consequence that might be contemplated is, at worst, that the bond issuer might find itself out of pocket altogether, where, for example, it did not hold adequate security to recover amounts that it might need to pay out under the bond. Or, the bond issuer will be obliged to bring proceedings including proceedings based on being subrogated to the right of the contractor to recover amounts overpaid to the principal.22 A clause in the performance bond deed which provides even partial protection to the bond issuer against such contingencies makes sense and explains why it was included in the deed. Because a rational interpretation of the deed can explain why the engineer's certificate might be required, there is no call to view the inclusion of such a provision as justifying the Court in interpreting the overall effect of the performance bond as requiring that there should be a comprehensive review of possible breaches of the DACC and resolution to any disputes arising therein before the bond issuer is required to pay out on a demand being made.
[66] In accordance with the approach indicated by these authorities which I
respectfully agree with, I do not agree that the performance bond can be interpreted
22 O’ Donovan and Phillips, above n 19, at [13-68], citing IIG Capital Llc v Van der Merwe [2008]
EWCA Civ 542, [2008] 2 Lloyd’s Rep 187 at [27].
as one that called for performance only if the plaintiff was first able to establish that
Mainzeal was in breach of the underlying contract.
[67] That is not to say that breach is wholly irrelevant to the accrual of rights under the performance bond but the parties have agreed that all that needs to be demonstrated is that the engineer to the contract considers that a default under the contract has occurred which the contractor has not remedied following reasonable notice to do so and that the sum demanded “is in the sole opinion of the Engineer reasonable” and that the engineer certifies accordingly.
[68] The reference to the “sole opinion” is obviously directed to forestall an argument that the contractor has the right to insist that some other person or entity, such as the Court, should enquire into the questions of whether there had been a default and the reasonableness of the amount claimed under the bond. This is consistent with an interpretation that all that is required as a precondition to payment is a valid certificate from the engineer.
[69] Another relevant passage in the performance bond deed which provides some guidance to how the document should be interpreted, is the reference to the fact that the bond issuer is to be regarded as the “primary obligor, to pay … any sum or sums” of money demanded under the performance bond. The exact meaning of this expression in the context of the deed is not one that can be precisely stated. However, it may be an indication that the parties were referring to the well-known distinction under contracts of guarantee between a primary liability which the guarantor has, or one which is merely that of surety who is required to see to it that the principal party performs the obligations under the contract. If that is the correct analogy, then the description of the bond issuer as the “primary obligor” is another indication that questions of whether or not the contractor is in breach of its obligations under the construction contract are not relevant matters to be enquired into when demand is made.
[70] As well, the requirement that the bond issuer will pay “upon demand”
indicates an unconditional obligation to pay.
[71] A further feature of the performance bond which needs to be noted is the wording of the remaining part of clause 2 which I have already set out above at [59].
[72] The sub-paragraphs (a) – (g) are events which would typically discharge a mere surety. The inclusion of a saving provision of this kind has been viewed as of significance when construing a performance bond. Reference was made to this matter in Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bank of Greece SA,23 a decision of the English Court of Appeal.
[73] In construing the nature of a guarantee document, the Court said that “the only assistance which the courts can give in practice is to say that, while everything must in the end depend on the words actually used by the parties, there is nevertheless a presumption that, if certain elements are present in the document, the document will
be construed in one way or the other.”24 Longmore LJ continued:25
It is exactly this kind of assistance that the editors of Paget's Law of Banking have endeavoured to provide. In the 11th edition of that work these words appeared under the heading of "Contract of Suretyship v demand guarantee":-
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.
[74] The passage from Paget has therefore been recognised as being an authoritative statement of the usual way in which the court will construe a contract which contains the types of provisions there discussed. The inclusion of such provisions, according to that line of authority, suggests that the obligation is in fact that of a surety only. However, as in all cases involving contractual interpretation, whether the effect that is generally accorded to an expression applies in a specific case depends upon the actual wording used.
[75] It would appear that whether any given instrument comes within the stated
23 Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bank of Greece SA [2012] EWCA Civ 1629, [2013] Bus LR D76.
24 At [25].
25 At [26].
category of a “demand guarantee” depends upon some additional analysis being carried out. Obviously, where there is included in a bond an unequivocal statement that events such as the extension of time to complete contracted works will not discharge the guarantee, a fair inference to be drawn is that were it not for the saving provision, the event of giving time would have such an effect. That gives rise to an inference that the instrument is intended to give a surety-type obligation. Where however the words are introduced, as here, with the expression “for the avoidance of doubt”, the draftsperson is not plainly proceeding on the basis that the instrument imposes only the liability of a surety. The draughtsperson has gone out of his or her way to say, in effect, that notwithstanding the parties’ intent that the document should be an unconditional bond, it is possible that it could be read as a document creating the obligation of a mere surety only. The provision could be read as a parenthetical clause, explanatory of the effect of the other operative parts of the deed and in that function reinforces that liabilities under the bond are different from, and do not have the same consequences as those which are incumbent on a mere surety. I do not consider, therefore, that this is an influential consideration in the present context.
[76] In my view, the features which seem to me to be relevant to the issue of bond interpretation are persuasive of the view that the obligation which the bond issuer incurred when it entered into the bond was unconditional and was not dependent on matters such as whether the principal has established breach of the DACC.
[77] The cases that I have made reference to which emphasise the importance of the performance bond fulfilling a function equivalent to the provision of a cash security, reinforces the apparent unconditional nature of the obligations contained in the performance bond as revealed by the language which the parties themselves used.
[78] It is nonetheless necessary to consider whether there is some aspect of the parties’ contractual documents which gives rise to an inference which could defeat what I consider to be what the primary meaning of the performance bond, as revealed by the decided cases and by the words that the parties used.
Relevance of the fact that bond issuer is not a bank
[79] Further comment is required concerning the inclusion in the passage from Paget, referred to above at [72], of the reference to guarantees which are issued by a bank. Some analysis is required regarding whether bond issuers that are not financial institutions are treated differently to bond issuers that are financial institutions.
[80] Brief reference was made to this issue in the United Kingdom judgment of Marubeni Hong Kong and South China Ltd v Mongolian Government.26 In that case the bond issuer was not a commercial institution but was, as the name of the case suggests, a sovereign government. In his judgment Carnwath LJ cited Chitty on Contracts which described a performance bond as a facility being “in essence, exceptionally stringent contracts of indemnity”. They contain the unusual feature “that the bank’s liability arises on mere demand by the creditor”.27 Carnwath LJ referred to the “demand bond” as a “specialised form of irrevocable instrument, developed by the banking world for its commercial customers”.28
[81] There is a further part of the discussion in the judgment of Carnwath LJ which explains the position that commercial institutions such as banks occupy in relation to the issue of performance bonds. His Honour noted:29
In Siporex, Hirst J applied the same approach to the interpretation of an instrument issued by a bank pursuant to an obligation in an international trade agreement to provide a performance bond. The instrument was described in correspondence between the parties and with the bank as a performance bond. The judge commented:
There is in my judgment no real hardship on the bank in imposing this strict liability to pay. A performance bond is a commercial instrument. No bank is obliged to enter into it unless they wish to and no doubt when they do so, they properly exact commercial terms and protect themselves by suitable cross-indemnities, such as were entered into in the present case.
[82] It will be seen that Carnwarth LJ apparently concurred with the reasoning of
26 Marubeni Hong Kong and South China Ltd v Mongolian Government [2005] EWCA Civ 395, [2005] 1 WLR 2497.
27 At [22].
28 At [23].
29 At [25] (citations omitted).
the Court in Siporex Trade SA v Banque Indosuez.30 It seems to me that there is no warrant for restricting the application of the principle, the reasoning behind which Hirst J explains, only to performance guarantees which are issued by financial institutions which literally comes within the description of a “bank”. The same considerations that Hirst J made reference to are applicable to underwriting companies such as the defendant in this case. Just as with banks in general, there was no obligation on the defendant to issue the bond in this case. It was open to the defendant to decline to issue the bond and, if it should elect to proceed, to set the price for the bond at a level which reflected its assessment of the extent of the risk involved. When consideration is focused on the context in which the bond was given and words that were used, I would view the position of the defendant as being the equivalent of a bank. There is no need to read down the provisions of the bond or to subject it to a benevolent interpretation in favour of the bond issuer because of the stringent nature of the obligation that it contained.
Relevance of fact that transaction is not of an international nature
[83] The extract from the text in Paget referred to above at paragraph [72] also referred to the fact that an international transaction is one of the indicators that the bond issuer would be liable notwithstanding a lack of proof of default by the relevant party to the underlying contract.
[84] It may be that performance bonds typically originated in the case of international transactions. The vulnerability of offshore parties would have been seen as providing a good commercial reason why a claimant who was not in the jurisdiction ought to be able to enforce the obligation contained in the performance bond. However, demand bonds have been recognised in the New Zealand jurisdiction, albeit not in the construction context, even where there has not been an international dimension to the transaction. The plaintiff refers me to two relevant
New Zealand cases: see New Zealand Home Bonds Ltd v Gill31 and Sim v New
Zealand Home Bonds Ltd,32 in which New Zealand courts found there was liability without exploring the issue of default on the part of the party to the underlying
30 Siporex Trade SA v Banque Indosuez [1986] 2 Lloyd's Rep 146 (QB).
31 New Zealand Home Bonds Ltd v Gill [2014] NZHC 312.
32 Sim v New Zealand Home Bonds Ltd [2010] NZCA 192, (2010) 11 NZCPR 530.
contract. Therefore, the lack of an international transaction does not detract from a
bond issuer’s obligation to pay.
The windfall point
[85] The defendant in support of its contentions that it ought not to be required to make payment under the bond, makes the following additional point:
30.In particular, if the defendant is required to make payment to the plaintiff for the full amount of the demand then:
(a) The plaintiff receives payment for items not covered by the Bond. Unless the liquidators of Mainzeal seek to recover such sums from the plaintiff, the plaintiff receives a windfall; and
(b) The defendant would have to look to the liquidators of Mainzeal to recover the sums paid out under the Bond. If the liquidators do not look to recover such from the plaintiff, the defendant has no other recourse. Even if the liquidators do look to recover from the plaintiff, the defendant would be competing with other unsecured creditors for any sums received and would not recover the full amount paid out under the Bond.
[86] In my view the above submission is not correct.
[87] Similar contentions have been advanced in other cases. In the United Kingdom there is a line of authority dealing with the point. One of the more recent authorities is Court of Appeal decision in Uzinterimpex JSC v Standard Bank PLC.33
[88] The facts of that case are complicated but the proceeding was concerned with a claim that was brought by the plaintiff, a seller of cotton to recover what it considered had been paid out on an excessive demand made by the purchaser under a guarantee.
[89] The seller entered into a contract for the sale of cotton, the purchase of which was financed by the defendant bank that provided an advance payment. The bank required a guarantee of the seller’s obligations and it obtained that from an
Uzbekistan bank, NBU (the bond issuer). The seller claimed that the defendant bank
33 Uzinterimpex JSC v Standard Bank PLC [2008] EWCA Civ 819, [2008] 2 Lloyd’s Rep 456.
had made an excessive demand on NBU. That is, it had contrived to have NBU pay more to itself than was owing under the contract. The seller contended that there ought to be implied into the agreement between the defendant bank and NBU (whom the seller, presumably had been required to indemnify) that the defendant would repay amounts in excess of its entitlement. In other words if NBU paid out more than the defendant was entitled to, the defendant would be obliged to repay the money to the seller. In practical terms the guarantee was said to be subject to an
implied term:34
… that the Bank [would] account to NBU (or the claimant as its assignee) in circumstances where the bank had received both the proceeds of the guarantee and the proceeds of the cotton to which it related.
[90] The High Court at first instance declined to imply such a term and the Court of Appeal agreed with this conclusion.
[91] The Court of Appeal in its judgment approved an earlier formulation of the position set out in the judgment of Morison J in Cargill International SA v Bangladesh Sugar & Food Industries Corp:35
[I]t seems to me implicit in the nature of a bond, and in the approach of the Court to injunction applications, that, in the absence of some clear words to a different effect, when the bond is called, there will, at some stage in the future, be an “accounting” between the parties.
…
If there has been a call on a bond which turns out to exceed the true loss sustained, then the party who provided the bond is entitled to recover the overpayment.
[92] The Court of Appeal in Uzinterimpex concluded:36
The guarantee stands as an independent contract between NBU and the Bank and is capable of operating effectively without the need for such a term. If a demand under the guarantee resulted in the wrongful refund of part of the price due to the seller, the seller would have a remedy against AMJ under the contract of sale. It is well established, as indeed Mr Gruder recognised, that in the ordinary case a performance bond is intended to provide a provisional
34 At [19].
35 Cargill International SA v Bangladesh Sugar & Food Industries Corp [1996] 2 Lloyd’s Rep 524 (QB) at 528 and 530. 36 Uzinterimpex,above n 33, at [20] per Moore-Bick LJ (citations omitted).
36 Uzinterimpex,above n 33, at [20] per Moore-Bick LJ (citations omitted).
remedy and that in the absence of clear language in the contract pursuant to which it is issued either party can seek to recover from the other the additional amount of its loss or the amount by which the amount paid under the bond exceeds its true liability. There will, in other words, usually be room for an accounting between the parties to reflect their rights and liabilities under the underlying contract. That provides the answer to the
‘windfall’ argument, despite the fact that in this case the remedy may be of
little practical value because AMJ is insolvent.
[93] The basis upon which an accounting will be ordered has been considered in a number of other cases including Comdel Commodities Ltd v Siporex Trade SA where Potter LJ in the judgment of the English Court of Appeal, also expressly approved the decision in Cargill in the following words:37
The law in this respect has recently been the subject of an illuminating decision of Morison J in Cargill International SA v Bangladesh Sugar and Food Industries Corporation in which the authorities are reviewed, most notably decisions in two Australian cases and dicta of Lord Denning MR in State Trading Corporation of India Limited v ED & F Man (Sugar) Limited.
Those authorities are to the effect that it is implicit in the nature of a performance bond that, in the absence of some clear words to a different effect, when the bond is called, there will at some stage in the future be an "accounting" between the parties to the contract of sale in the sense that their rights and obligations will finally be determined at some future date. The bond is a guarantee of due performance; it is not to be treated as representing a pre-estimate of the amount of damages to which the beneficiary may be entitled in respect of the breach of contract giving rise to the right to call for payment under the bond. If the amount of the bond is not enough to satisfy the seller's claim for damages, the buyer is liable to the seller for damages in excess of the amount of the bond. On the other hand, if the amount of the bond is more than enough to satisfy the seller's claim for damages, the buyer can recover from the seller the amount of the bond which exceeds the seller's damages.
It does not appear that there is anything in the words of the contracts of sale in this case to exclude the implication that there would at some stage be an "accounting" between the parties in the sense that their rights and obligations would be finally determined at some future date.
[94] Two important points appear from the authorities. First the description of the performance bond as a “provisional remedy” indicates that a determination that there must be a payment out under the performance bond is one that has only interim effect. That is to say, it reflects that the intention is to pay now and litigate later.
Secondly, the accounting is between the contractor and the principal. It is not an
37 Comdel Commodities Ltd v Siporex Trade SA [1997] 1 Lloyd’s Rep 424 (CA Civ) at 431
(citations omitted). 38 O'Donovan and Phillips, above n 19, at [13-31].
accounting between the bond issuer and the principal. The point that the underlying contract and the contract between the principal and the bond issuer are quite independent has been noted elsewhere in this judgment. Because the two contracts are independent, it would be wrong in principle to take the view that the bond issuer has any rights arising from the contract between the two parties to the underlying contract.
[95] Therefore, assuming that those authorities are persuasive authority concerning performance bonds in New Zealand, as I do in the absence of authority to the contrary, the fact that the bond issuer, via the performance bond is required to meet the obligations under the bond in the first instance is not the last step in the sequence. There will be an accounting later which may reverse the effect of the payment.
[96] Secondly, there is no right for the bond issuer to require the Court to go into the question of whether or not there has been anything in the nature of double recovery obtained by the principal under the performance bond. There are means by which the parties to the underlying contract can adjust any imbalance if there has been an excess of payments recovered by the principal under the performance bond. If that occurs, it is likely to have an indirect effect on the interests of the bond issuer in that the contractor is put back in funds with which it may be able to, in turn, meet its obligations to the bond issuer. Any “windfall” would be in the hands of the plaintiff. Further, it is the contractor, Mainzeal, who would have the right to seek an accounting with the plaintiff in regards to any excess payment and not the bond issuer.
[169] Beyond that, the defendant putting forward figures of what, in its view, would be reasonable costs does not assist. As noted elsewhere in this judgment, the parties entrusted the contract engineer to come up with a figure that in his view was reasonable. It is not to the point for a party to provide evidence of what another engineer might consider was a reasonable amount.
[170] Moreover, given that Mr Hemi’s evidence was substantially focused on questions of defects under DVS2, and did not consider what might be claimable by way of residual defects that had accrued under DACC, his opinion on the issue of quantum is of limited assistance when it comes to appraising the engineer’s certificate.
Defence that work previously signed off by engineer or independent reviewer
[171] Mr Hemi in his evidence also made mention of the fact that some of the items which the engineer included in his claim had been “closed off” by the Independent Reviewer. I assume that this means that an Independent Reviewer has not found any problem with some of the items which Mr Milroy was later to include in the list of defects which made up the claim against the defendant.
[172] It is not possible on the basis of the material before me to come to any clear view as to the basis upon which the Independent Reviewer was appointed and what, if any, effect his decisions would have upon the legal rights of the parties to the DACC or DVS2. It cannot be said that this particular aspect of the opposition provides an arguable defence to the defendant.
Conclusion
[173] I conclude that there is evidence that the engineer included in the claimed defects items that were outside the works that Mainzeal was required to perform under the DACC or DVS2. As a result, there is an arguable defence that the
certificate which the engineer gave is able to be reviewed by the Court on the ground that it fell outside the scope of the matters in relation to which the engineer was required to certify. Alternatively, it was not the type of certificate that complied with the principle in Abu Dhabi.
Result
[174] The application for summary judgment is dismissed. The parties should confer on the question of costs and if they are unable to agree, they should submit brief synopses within 10 working days of the date of this judgment.
[175] They should also confer on the issue of the future steps that are to be taken to progress this proceeding. The registrar is also to arrange for the proceeding is to be listed for mention in a Chambers list in October 2014 and to advise the parties of the
date.
J.P. Doogue
Associate Judge
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