Update – Restraining a Principle`s call on security

28 April 2015
CDI Lawyers Update
Construction, Development & Infrastructure
Restraining a
Principle’s call on
security: is a Bona Fide
claim still enough?
TCS argued that NSS was not entitled
to have recourse to the security on
three grounds:
1.
2.
In TCS Civil & Building Pty Ltd (TCS) v
Northern Stevedoring Services Pty Ltd
(NSS), TCS applied for an interlocutory
injunction to prevent NSS from having
recourse to bank guarantees it had
provided as security for performance
under an AS 4902 – 2000 Standards
Australia design and construct
contract.
The Arguments
Both parties alleged the other had
wrongfully terminated the contract.
On 28 October 2014, NSS issued a
notice to TCS that it elected to
terminate the contract as a result of
TCS’s alleged substantial breach. On
20 November 2014, the
superintendent issued a certificate for
liquidated damages for late
completion, totalling $352,500.00. On
28 November 2014, TCS issued a
notice to NSS that it had elected to
terminate the contract for NSS’s
repudiation. It followed that the
contract was terminated by no later
than 28 November 2014.
On 28 January 2015, TCS received a
notice from NSS advising that it
intended to have recourse to the bank
guarantees in order to offset claims
for current and future rectification
costs, along with the
certified
liquidated damages for late
completion up to 15 January 2015.
TCS disputed both claims.
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3.
that there was no amount due
and payable under the terms of
the contract;
section 67J of the Queensland
Building and Construction
Commission Act 1991 (Qld); and
an equitable right to the return
of the guarantees.
Reasoning of Justice P Lyons
Most significant was His Honour’s
reasoning as to when, and on what
grounds, a party may have recourse
to security provided for performance.
Clause 5.2 of the AS 4902 – 2000
contract provided:
“[Security] …shall be subject to
recourse by a party who remains
unpaid after the time for
payment where at least five days
have elapsed since that party
notified the other party of its
intention to have recourse."
Lyons J adopted the Full Court’s
reasoning in Clough
Engineering Limited v Oil and Natural
Gas Corporation Limited that the
terms of a contract need to be
construed in each particular case and
that clear words are required to
support a construction that inhibits a
beneficiary from calling on a
performance guarantee where a
breach is alleged in good faith, i.e. not
fraudulently. However, His Honour
took a different view of the effect of
clause 5.2 than had previously been
expressed by Siopis J in Redline
Contracting Pty Ltd v MCC Mining
(Western Australia) Pty Ltd (No 2)
(Redline) which featured a clause 5.2
in identical terms.
In Redline, Siopis J adopted the
approach taken in a line of cases
including the Victorian Court of
Appeal cases of Fletcher Construction
Australia Ltd v Varnsdorf Pty Ltd and
Bachmann Pty Ltd v BHP Power New
Zealand Ltd, both of which were
approved by the Full Federal Court in
Clough. His Honour concluded that
the likely construction of clause 5.2
was that it allocated risk to a
particular party when a dispute arose,
and that recourse to security would
not be conditional upon there being
an undisputed amount due and
payable. His Honour considered that
it would be sufficient for a party
resorting to security to honestly
believe that there was an amount due
and payable and that recourse would
not be precluded simply by reason of
the disputed claim being an
unliquidated claim for damages.
Lyons J took the view that clause 5.2
of the contract regulated the conduct
of NSS in two ways. Firstly, NSS was
required to give notice that it
intended to have recourse to the
security, and secondly, NSS could only
have recourse where there was a time
for payment and it remained unpaid
after the expiration of that time. His
Honour found that, with respect to
the rectification works, that there was
no basis on which it could be said that
an amount had been determined as
payable, or a time for payment
determined. The demand from NSS
was not sufficient and merely
particularised a claim for unliquidated
damages.
With respect to the claim for
liquidated damages for late
completion, His Honour took the view
that it was strongly arguable that, for
the purposes of determining whether
recourse could be had under clause
Update
5.1, the mechanism in clause 29.3 of
the contract gave the principal a right
to the payment of an amount due at
that time.
Lyons J rejected TCS’ argument that
practical completion had been
deemed to have been extended by the
superintendent’s failure to respond to
EOT claims, as the relevant claims had
not been made by TCS within time.
Having found that TCS had real
difficulty in establishing an
entitlement to restrain NSS only with
reference to the terms of the contract,
His Honour then considered whether
NSS was obliged to have given a
notice under section 67J of the
Queensland Building and
Construction Commission Act 1991.
His Honour determined that it was
not arguable that TCS had an accrued
right to be given notice under section
67J following termination of the
contract, on the basis that the
language of the section and its
general structure were that it did not
remain operative after termination.
Further, clause 34.7 of the contract
contemplated that an amount for
liquidated damages could be certified
after termination.
Conclusion
The decision was made in the context
of an AS 4902 -2000 contract and in
circumstances where the QBCC Act
did not apply by reason that the
contract had been terminated.
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Lyons J has casted doubt as to
whether the approach taken in
Redline is correct, and suggests that
there must be more than a bona fide
belief that an amount is due and
payable or that there is an
unliquidated amount claimed for
damages, where there is a contractual
mechanism for the superintendent to
certify amounts as due and payable.
Ultimately, the position remains that
clear words will be required to have
the effect of limiting the principal’s
entitlement to have recourse to
security.
It remains to be seen whether Lyons
J’s interpretation of clauses such as
those in the unamended clause 5.2 of
AS4902 - 2000 will be followed in
Queensland or whether the more
established line of authority adopted
in Redline prevails.
If the QBCC Act does still apply to the
contract, the requirement of section
67J that the amount proposed to be
deducted is an amount “owed” will
preclude recourse where the amount
is merely “claimed to be owing” but
not, in truth, payable or owed under
the contract.
What this means for you
Principals should consider amending
their contracts to preserve the
entitlement to have recourse to
security where they hold a bona fide
belief that an amount is due and
payable or will become due and
payable. Contractors should seek a
more balanced clause, at the
minimum with the protection
afforded by the unamended form in AS
4902.
Key Contacts
Stephen Pyman
Principal
p. 07 3367 7102
e. [email protected]
Gareth Rogers
Principal
p. 07 3367 7104
e. [email protected]
Josh Kemp
Principal
p. 07 3367 7103
e. [email protected]