Australia: Back off, that's my security!: Accessing security under a building contract in Queensland

Key message

Section 67J of the Queensland Building and Construction Commission Act 1991 (QBCC Act) requires a party to a building contract, before using security under the contract, to:

• give notice advising of the proposed use and of the amount owed, and
• give that notice within 28 days after the party becomes aware or ought reasonably to have been aware of the party's right to obtain the amount owed.

The effect of the decision in Beyfield Pty Ltd v Northbuild Construction Sunshine Coast Pty Ltd [2014] QSC 12 is that, in order to use a security (eg. bank guarantee), a party must demonstrate compliance with the conditions in section 67J that there is a "debt due" and that it has given notice as required by section 67J.

A clause in a building contract which allows a party to use security without complying with the conditions in section 67J will be unenforceable to the extent that it is inconsistent with those conditions.

Background

Beyfield provided security to Northbuild under a subcontract for building work in the form of two bank guarantees.

Section 67J of the QBCC Act

The effect of section 67J of the QBSA Act (now the QBCC Act) was that:

• Northbuild could use the security to obtain an "amount owed under the contract" (ie. a "debt due") only if it had given notice in writing advising of the proposed use and of the amount owed (s. 67J(1)), and
• the notice must have been given within 28 days after Northbuild became aware or ought reasonably to have been aware of its right to obtain "the amount owed" (s. 67J(2)).

Under s. 67E(3), a contract is unenforceable "to the extent that [it] provides for...security in a way that is inconsistent with a condition to which the contract is subject under division 2 [of Part 4A of the Act]".

The subcontract

Under the subcontract, Northbuild's ability to use the security was wider than was permitted under s. 67J – Northbuild could, "upon the giving of written notice", convert a bank guarantee into cash "in respect of any claim to payment (liquidated or otherwise)" Northbuild may have against Beyfield under the contract or otherwise [clause 5(e)(ii)].

For example, Northbuild's clause did not require that there be a "debt due" nor a notice setting out the amount owed, nor was the notice required to have been given within any time period.

The issue

The key issue in the case was whether clause 5(e)(ii) was void or unenforceable.

The decision

The Court held that clause 5(e)(ii) provided for security in a way that was inconsistent with a condition to which the contract was subject under the relevant part of the QBCC Act. Therefore, to that extent, it was unenforceable.

Northbuild was not able to demonstrate that its proposed use conformed with the condition in section 67J that there be a "debt due". Therefore, Northbuild could not convert the bank guarantees.

Analysis of the Court's reasons

Two principal grounds were:

1. Requirement for "debt due"

Clause 5(e)(ii) allowed conversion for claims to payment by Northbuild other than for "debts due". The Court referred to Multiplex v Qantas Airways [2006] QCA 337 which recognised that s. 67J is concerned with "amounts which are, in truth, payable or owed under the contract...not...with amounts 'claimed to be owing' or with amounts 'certified as payable'...". An unliquidated claim (eg. a claim for damages for breach of contract) is not a "debt due" and, therefore, Northbuild could not convert the bank guarantees to recover those unliquidated claims.

Northbuild argued that section 67J applied to "debts due" but did not apply to other claims. That interpretation would have the effect of requiring Northbuild to use the nominated notice to convert the bank guarantee if there was a debt due, but would allow it to convert the bank guarantee without the nominated notice for other claims. The Court considered that the Act set out to regulate the building industry and to limit the scope of set-offs. The Court considered that Northbuild's interpretation to be inconsistent with the scheme of Part 4A of the Act.

2. Notice requirements in s. 67J(2)

The Court considered that the notice requirements were each "a condition to which the contract is subject under division 2 [of Part 4A of the Act]", as required by s.67E(3). Although the decision does not expressly state it as a conclusion, it would seem that, to the extent the clause provided for security in a way that was inconsistent with the condition, it was unenforceable.

Clause 5(e)(ii) provided for security in a way that was inconsistent with s. 67J(2). In order to be able use the security, s. 67J(2) required Northbuild to give notice within a nominated timeframe and containing particular advice (ie. use of security proposed and the amount owed). Clause 5(e)(ii) entitled Northbuild to use the security without a requirement that it give notice within that timeframe or containing that particular advice.

Again, although not expressly stated, it seems that without giving a compliant notice, Northbuild could not convert the bank guarantees to recover for the relevant claims.

Comment

Failure to comply with some conditions in s. 67J may not be able to be remedied. For example, failure to give a timely notice could prevent the security from being accessed for a particular amount owed.

To use a bank guarantee, a party to a building contract should ensure that:

• the building contract creates an entitlement to amounts owed (as a "debt due")
• there are procedures in place so that the party providing the security is given timely notice of the other party's right to obtain the amount owed.

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.