Total Construction Pty Ltd v Catholic Healthcare Limited  NSWSC 585
It is common for bank guarantees (BGs) to be used as a form of security to secure the performance of a contractor's obligation in a construction contract. A principal's right to have recourse to the BGs is often governed by the construction contract.
The case of Total Construction Pty Ltd (Contractor) v Catholic Healthcare Limited (Principal)  NSWSC 585 reinforces a principal's right to have recourse to BGs for a 'bona fide claim'. This means that a principal only needs to show an honest and genuine belief that the contractor was in default (unless such allegations were rebutted).
Facts of the case
The parties entered into a design and construct contract for a residential aged care facility in Kincumber, New South Wales, for a lump sum of circa $28 million (Contract).
It was a provision in the Contract that the Contractor was required to provide 2 unconditional BGs as security for its performance of the Contract and that the Principal is entitled to have recourse to the 2 unconditional BGs if it had a 'bona fide claim'.
On 4 May 2023, the Principal issued a show cause notice alleging the following substantial breaches of the Contractor:
- the Contractor substantially departed from the program without reasonable cause or the Principal Representative's approval; and
- there was a materially detrimental change in the financial position of the Contractor.
On 19 May 2023, the Principal terminated the Contract and demanded $11.9 million (Demanded Amount) from the Contractor. The Demanded Amount was calculated based on the extra over costs to complete the project (as alleged by the Principal).
The Contractor then applied for an ex parte injunction application to restrain the Principal from calling the 2 unconditional BGs alleging that:
- the Principal did not have a 'bona fide' claim to call on the BGs;
- the Principal had engaged in unconscionable conduct; and
- the Contractor argued that the Principal could only call on the BGs once any amount payable to the Principal has been quantified.
The Court granted a temporary injunction with the usual undertaking provided by the Contractor as to any damages suffered by the Principal.
On the return date of the injunction application, the Court refused to extend the injunction as the Contractor failed to prove why the Principal was not entitled to have recourse to the 2 BGs under the construction contract:
- the Principal's show cause notice established a 'bona fide claim' against the Contractor;
- the Contractor failed to identify any unconscionable conduct engaged by the Principal; and
- the Principal was not required to wait until it was able to quantify the loss arising from the Contractor's breach to be entitled to call on the BGs.
The Court made it clear that when a construction contract provides for security to be called based on a 'bona fide claim', a principal only needs to show an honest and genuine belief that the contractor was in default.
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.