Australia: Court insists on compliance with contractual pre-conditions for the release of security


In the recent case of St. Hilliers Construction Pty Ltd (In Administration) v. Fitzpatrick Investments Pty Ltd [2012] NSWSC 804, the New South Wales Supreme Court held that the contractor was not entitled to have its security reduced at practical completion because it had not complied with the relevant contractual pre-conditions. The case serves as an important reminder to contractors to carefully consider the requirements under their contracts for the return of security (usually retention monies or a third party bond/guarantee) and to ensure that these requirements are properly satisfied.

The case concerns a D&C contract for the construction of a commercial building in Docklands, Melbourne. The contract obliged the contractor to provide three bank guarantees amounting to 5 per cent of the contract sum. The works achieved practical completion on 31 October 2011, coinciding with the date that the principal took physical possession of the works. Shortly thereafter, in May 2012, the contractor went into voluntary administration and the principal exercised a contractual right to terminate the contract.

The issue before the court was whether the contractor had, prior to termination, satisfied the preconditions obliging the principal to release 50 per cent of the security.

The contractual preconditions

Among the preconditions for the principal releasing 50 per cent of the security was the issue of a certificate of practical completion and the provision of "each other document or matter required to be provided or satisfied for practical completion".

Clause 9.9 "Certifications by Consultants" set out preconditions for the issue of a certificate of practical completion, among other things. At the core of the dispute was the fact that clause 9.9 prescribed two forms of certification by consultants:

"It shall be a condition precedent to the issue of each payment claim, any Certificate of Practical Completion, acceptance of defects rectification and the Final Certificate that all Consultants ... certify in writing that the relevant work under the Contract has been completed in accordance with the Contract and the approved design documents, where the certification relates to a claim for the payment of money, using the form of certification in Annexure Part F." (emphasis added)

The form in Annexure Part F essentially required a consultant to confirm that they were not in any material dispute with the contractor, that the works to the date of the statement had been completed in accordance with the applicable design documents and the contract, and that they were not aware of any matters that may result in the works not being fit for their intended use.

The contractor's submissions

It was accepted by the parties that the superintendent issued a certificate of practical completion in November 2011 despite the fact that no consultants had certified in writing that the relevant work under the contract had been completed in accordance with the contract and the approved design documents.

However, the contractor argued that it was entitled to have 50 per cent of the security returned to it on two alternative grounds:

  1. That the requisite certification occurred by not later than 13 March 2012 when it provided the principal with certificates signed by each of the relevant consultants in the form prescribed by Annexure Part F;
  2. In the alternative, that the principal waived compliance with the preconditions for releasing the security by exercising an inconsistent election to take possession of the works. The contractor said this amounted to the exercise of an election inconsistent with the maintenance of a right to continue to hold the bank guarantee.

The court's decision

The court rejected both the contractor's submissions and gave judgment in favour of the principal.

In relation to the issue of compliance with the contractual preconditions, the court commenced its analysis by stating that:

"It is well settled that it is meaningless to speak of the substantial performance of a condition precedent. Either it has been performed or it has not".

The court held that the certificates were not in the form contemplated by clause 9.9, which required an unqualified certification that the relevant work under the contract had been completed in accordance with the contract and the approved design documents. The certificates provided by the contractor did not satisfy this condition because they included the qualification "work to the date of the statement", which was inconsistent with the unqualified nature of the certification contemplated by clause 9.9. Furthermore, the certificates were in the form prescribed by Annexure Part F, the principal purpose of which was to support claims for progress payments rather than the attainment of practical completion.

The court briskly rejected the contractor's second submission. It held that the taking of possession of the works by the principal was not inconsistent with its entitlement to require proper certification. Furthermore, clause 48 of the contract expressly provided that none of the terms of the contract would be waived except with the prior consent in writing of the principal, which had not been given.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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