Australia: Supreme Court of NSW refuses to restrain principal from having recourse to bank guarantees following adjudication determination in favour of builder

In brief – Court refuses to grant injunction to builder

The NSW Supreme Court held that a builder was not entitled to an injunction restraining the council from having recourse to security (bank guarantees) to recover amounts paid to the builder which were the subject of an adjudication determination.

Builder provides two bank guarantees as security for performance of obligations

The case Patterson Building Group Pty Ltd v Holroyd City Council [2013] NSWSC 1484 involved a contract between Patterson Building Group and the Holroyd City Council, under which Patterson provided two bank guarantees, each in the amount of $232,091.70, as security for the performance of its obligations under the contract.

Security was subject to recourse by the council if it remained unpaid after the time for payment or where the council claimed to be owed money by Patterson (clause 5.2).

The council's entitlement to security was to be reduced by 50% upon the issue of a certificate of practical completion.

Council pays builder after payment claim and adjudication determination

In May 2013, Patterson served a $499,802.61 payment claim on the council under the Building and Construction Industry Security of Payment Act 1999 ("the SOP Act") in relation to work carried out under the contract.

In July 2013, the adjudicator determined that $468,360 inclusive of GST was payable by the council to Patterson.

The council paid the adjudicated amount to Patterson.

Builder and council enter into further agreement

In June 2013, Patterson and the council entered into a further agreement in circumstances where Patterson and the council were in disagreement at that time as to whether practical completion had been achieved. Pursuant to this further agreement, it was agreed, amongst other things, that:

  • certain work (O&M manuals, as-builts, warranties and defects) remained incomplete ("the outstanding works")
  • clause 5.4 of the contract would be amended to the effect that upon completion of the outstanding works, the council's entitlement to security was to be reduced by 50%

Superintendent issues builder with notice listing defects requiring rectification

Patterson alleged that the outstanding works were completed in June 2013.

Prior to June 2013, the council engaged consultants to inspect Patterson's work, with reports listing various defects then being served on Patterson.

In August 2013, the Superintendent issued to Patterson a notice under the contract listing 51 defects which required rectification by Patterson, failing which the work would be carried out by others, with the costs incurred (estimated at $153,458) to be certified as money due and payable by Patterson to the council.

The council further alleged that not all warranties in the form required under the contract had been provided by Patterson.

Progress certificate and notice issued to builder – amounts owed to council

In August 2013, the Superintendent issued a progress certificate assessing that Patterson owed the council $138,143.52 exclusive of GST, which comprised an amount for liquidated damages and an amount for negative variations.

The amount certified for the liquidated damages was an amount that had been rejected in the adjudication determination in July 2013.

That same day, the Superintendent also issued a notice to Patterson indicating that, in addition to the progress certificate, he had formed the view that a further amount was due from Patterson to the council, described as an amount for variations adjudicated upon in the adjudication determination in July 2013.

That same day Patterson served a further $535,796.79 payment claim under the SOP Act on the council.

Builder commences proceedings in Supreme Court of NSW

Patterson requested the council to provide an undertaking that it would not call on the bank guarantees. The council refused to provide the undertaking sought.

In these circumstances, Patterson commenced proceedings in the Supreme Court of NSW, seeking to restrain the council from calling on the bank guarantees, a declaration that the outstanding works were complete and an order that the council release to Patterson one of the guarantees.

Was there a seriously arguable claim that the builder owed the council money?

In determining whether the council should be restrained from calling on the bank guarantees, Justice White considered whether:

  • there was no seriously arguable basis for the council's claim that Patterson owed money to the council
  • the balance of convenience favoured Patterson or the council

Council entitled to have recourse to bank guarantees without demonstrating that it was owed money

White J considered that clause 5.2 (refer above) concerning recourse to the bank guarantees did not require the council to demonstrate that it was in fact owed money.

Rather, the clause provided that it was entitled to have recourse if it claims to be owed money, subject to limited exceptions – that is, where the claim is made fraudulently, where the principal does not act in good faith, if the principal acts capriciously, if the exercise of its contractual right is unconscionable and in breach of the Australian Consumer Law, or if it is clear beyond serious argument that the principal has no right to the amount claimed.

Patterson contended that there was no seriously arguable basis for the council's claim, particularly in circumstances where Patterson had claimed a further amount in excess of the amount claimed by the council.

Recourse to security extends to damages for breach of contract

White J held that it was seriously arguable that Patterson had not in fact completed the outstanding works. White J accepted the council's argument that a claim for the purposes of having recourse to security extends to claims for entitlement to damages for breach of contract (including estimated costs for the rectification of defects).

White J further held that any cost incurred by the council to rectify defects could then be transmuted from a claim for damages to a claim for a debt owed pursuant to a Superintendent certification.

Builder argues that council's recourse to security inconsistent with SOP Act

In relation to amounts for matters which were the subject of the adjudication determination in July 2013, Patterson argued that:

  • it would be inconsistent with the SOP Act if the council could have recourse to security to recover any amounts paid for claims determined to be payable in an adjudication determination
  • if clause 5.2 had that effect, then clause 5.2 restricted the operation of the SOP Act and is therefore void under section 34

The council contended that Patterson's right to receive the adjudicated amount under the SOP Act (which was paid) was unaffected by any recourse by the council to the security and that the receipt by Patterson of that payment was subject to the council's contractual entitlements (including under clause 5.2).

Court finds that SOP Act does not preclude council from having recourse to security

In determining the issue White J considered an analogous situation of recourse to cash security and noted that such recourse would not have affected Patterson's rights under the Act unless Patterson was required to replenish that security.

White J also considered the theoretical situation of the council having recourse to security for the liquidated damages before any adjudication and found that there would be nothing in the SOP Act that would preclude the council from having recourse in that circumstance and that there was nothing Patterson could do under the Act to "undo" the effect of the council's recourse to security.

White J rejected Patterson's argument that clause 5.2 restricted or modified the operation of the SOP Act, noting that Patterson did not submit that the adjudication determination was so clear that it was not seriously arguable that different conclusions might be reached on a final determination of contractual entitlements.

White J found that as there was no serious issue to be tried about the council's entitlement to have recourse to the security, the question of balance of convenience did not arise, noting that Patterson agreed to supply the bank guarantees as security with the understanding and agreement that they could be called upon where the council claimed to be owed money. Accordingly the risk of hardship and of damage to Patterson's reputation were risks assumed by Patterson when it agreed to provide security on those terms.

In the circumstances, White J refused the relief sought by Patterson.

Pay close attention to drafting of relevant terms in contracts and to effective contract administration

Notwithstanding the determination under the SOP Act of claims, backcharges and liquidated damages, contracts can nevertheless be appropriately drafted so as to enable a party to have recourse to security for matters which were determined conversely in the adjudication determination before a final determination of parties' final contractual rights, without running afoul of the SOP Act.

Effective contract administration is also required to avail yourself of an appropriately drafted contract.

Charles Brannen James Neal
Construction and engineering
CBP Lawyers

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