FMT Aircraft Gate Support Systems v Sydney Ports Corporation

Supreme Court of NSW|2010-09-22|Before: Pembroke J

Introduction 2 The plaintiff, together with its joint venture partner, is the contractor pursuant to a contract to design, manufacture and supervise the construction of a gangway at the Overseas Passenger Terminal, Circular Quay. The defendant is the principal. The contract was entered into on 20 June 2007. 3 The general conditions of contract are based on AS4910-2002. They incorporate Amendment No 1 (March 2005). The standard was prepared by a joint Australian and New Zealand committee. It supersedes in part AS2987-1987 and is part of the suite of conditions of contract based on the AS4000-1997 general conditions of contract. 4 On or about 28 June 2007, the plaintiff provided a bank guarantee limited in the amount of $390,000 pursuant to the general conditions of contract. The bank guarantee was expressed to expire on 31 July 2010. On 9 July 2010, the defendant called upon the guarantee. 5 Clause 5.2 of the general conditions of contract entitles the defendant to have recourse to the security where the defendant "has any claim or entitlement to" the payment of damages, costs or an amount or debt due under the contract. The clause is in the following terms: The Purchaser may have recourse to security where the Purchaser has any claim or entitlement to payment of damages, costs or an amount or debt due by the Contractor to it under this contract. If the Purchaser calls on any security in Item 14(b), the Contractor if so directed by the Superintendent, shall provide further security as set out in Item 14(b) (as applicable) and in accordance with this Contract, for the amount called upon up to the limit required by the Contract. 6 The required form of the security is an unconditional undertaking from a financial institution on terms that it is agreed that the financial institution will make payment to the defendant forthwith without reference to the plaintiff and notwithstanding notice given by the plaintiff not to pay the same.

Meaning of "Claim" 7 The issue in this case turns on the meaning of the word "claim" in clause 5.2. The structure and syntax of clause 5.2 are significant. The word "claim" is clearly used in contradistinction to the word "entitlement". For further emphasis, the two words are separated by the conjunction "or" - a word ordinarily used to identify alternatives. Although it is tempting to make general statements about the policy and purpose of clauses of this nature, ultimately each will turn on its own construction. This is illustrated by the decided cases in this area of the law. To date most of them have turned on the meaning of the word "entitlement" where used in different syntactical and grammatical contexts: See Bachmann Pty Ltd v BHP Power New Zealand Ltd [1999] 1 VR 420 especially at paragraphs [30], [32] and [39] - [46] per Brooking JA. 8 For example, in Hughes Bros Pty Limited v Telede Pty Ltd (1989) 7 BCL 210 the relevant clause permitted recourse to the security "whenever the proprietor may be entitled to the payment of monies"; in Reed Construction Services Pty Ltd v Kheng Seng (Aust) Pty Ltd (1999) 15 BCL 158 the relevant clause permitted recourse to the security "whenever the proprietor shall be entitled to the payment of monies"; in Bachmann Pty Ltd v BHP Power New Zealand Ltd (supra), the relevant clause permitted recourse to the security when the principal "becomes entitled to exercise a right under the contract in respect of the security"; and in Pearson Bridge (NSW) Pty Ltd v State Rail Authority of New South Wales (1982) 1 Australian Construction Law Reports 81 and Barclay Mowlem Construction Ltd v Simon Engineering (Australia) Pty Ltd (1991) 23 NSWLR 451 the relevant clause also adopted the formula "becomes entitled". 9 All of these variations on a theme may give rise to legitimate questions about the content and circumstances of the entitlement on which they hinge. It is fair to say that, whenever the language permits, the courts have, especially in more recent times, adopted a generous approach to the meaning of "entitlement" - to reflect the perceived commercial purpose. In this contract, the drafter has endeavoured to remove any doubt by introducing an additional factor. This results in a qualitative difference. The notion of a "claim" as an alternative to "entitlement" has been invoked. 10 Both parties in this case are sophisticated commercial entities. I infer that they are and always have been well advised. They can be taken to have been aware of the numerous disputes and judicial decisions in this country concerning such clauses. They may be taken to have entered into this contract against that background. 11 It is obvious that the words "has any claim or entitlement" were intended to broaden the circumstances in which the principal could have recourse to the security. They reflect an allocation of risk that necessarily embodies a mutual accommodation of competing interests. The evident commercial purpose is that, as long as there is a claim or entitlement within the meaning of clause 5.2, the contractor and not the principal will be the party who is out of pocket pending final resolution of the dispute: Fletcher Construction Australia Ltd v Varnsdorf [1998] 3 VR 812 at 826 (Callaway JA). 12 Nevertheless, whatever the extent of the broadening of the circumstances that was intended, the formulation used in clause 5.2 still requires consideration of the precise meaning and extent of the word "claim". The word is used in many different contexts in the law. Its ordinary meaning however is of an assertion or demand. 13 It is stating the obvious to say that a valid claim within the meaning of clause 5.2 must be non-fraudulent. In that sense, it must be a genuine claim. It adds nothing to say that it must be bona fide. On the other hand, despite occasional suggestions to the contrary, I am satisfied that a mere honest or bona fide "belief" in a claim is insufficient: cf Clough Engineering Ltd v Oil & Natural Gas Corporation Ltd [2008] FCAFC 136 at [102]. The test could not be subjective honesty or bona fides. More is required. A claim that is irrational and misconceived could not justify recourse to the security simply because the claimant had an honest, but wrongheaded, belief in the correctness of its claim. Equally, it is inappropriate to insist that the claim be "genuine and fair" as the plaintiff submitted. And it is certainly not necessary that the claim be reasonable. Both would impose requirements on the principal that could well be onerous and productive of disputes. 14 What is required in my view is an arguable claim - one that is not specious, fanciful or untenable: Hughes Bros v Telede Pty Ltd (supra) at 216 (Cole J). This is at least consistent with decisions that have held that an "entitlement" for the purpose of such a clause will have been established even though there is a genuine dispute or serious issue to be tried as to the existence of the right which underpins the entitlement: Fletcher Construction v Varnsdorf (supra) at 821-3 (per Charles JA). 15 For my part, I think that the test of what is a "claim" for the purpose of a contractual provision such as clause 5.2 is relatively undemanding. An appropriate analogy is the criterion used for determining whether there should, or should not be, summary dismissal of a claim or proceeding: General Steel Industries v Commissioner for Railways (1964) 112 CLR 125. Such an approach would, in my view, reflect the commercial purpose and the allocation of risk which I have explained.

No Final Determination of Claim 16 One other preliminary observation should be mentioned. In proceedings such as these where the issue is whether the principal is entitled to have recourse to the security, it will almost always be unnecessary and inappropriate to determine the ultimate validity or quantification of the principal's claim. Those matters are for determination at a later stage. This is reflected in a passage from Hudson's Building & Engineering Contracts, 11th Edition, Ian Duncan Wallace, 1995, Sweet and Maxwell, United Kingdom at 17,075 where it is said: The normal interpretation will be that in response to the stipulated demand, an unqualified transfer of the sums in question is intended, provided only that there is a bona fide dispute or claim on the secured party's part, and any further investigation of its merits or extent is not usually intended by the contract.

17 Proceedings of this nature should not involve a trial of the merits. As was deftly observed in Wood Hall v The Pipeline Authority (supra) at 461, the commercial effectiveness of unconditional undertakings would be destroyed "if all the legal and factual complexities of a building dispute were injected" into what should otherwise be a relatively straightforward analysis.

18 In this case, the immediate question is whether the defendant has any claim in the sense that I have explained, so as to justify resort to the security in the amount of $390,000. It relies on three separate "claims" within the meaning of clause 5.2. I have concluded that at least two of those claims justify recourse to the security. It does not follow however that in any subsequent proceeding the defendant will necessarily succeed on each of those claims or any one of them. I will deal with each claim in turn.

19 Clause 34.1 of the general conditions of contract requires the contractor to reach practical completion by the date for practical completion. In this case, the date for practical completion of Separable Portion 1 (SP1) was 22 June 2007. The date for practical completion of Separable Portion 2 (SP2) was 13 February 2008. Each of those dates was subject to the grant of an extension of time. There was no provision for liquidated damages in SP1. But in SP2 liquidated damages were to be calculated at $785 a day. 20 Clause 34.3 provides for the grant of an extension of time on 2 conditions. The first is that the contractor is or will be delayed in reaching practical completion "by a qualifying cause of delay": clause 34.3(a). The second is that the contractor gives the superintendent within 28 days of when the contractor should reasonably have become aware of that causation occurring, a written claim for an extension of time evidencing the facts of causation and of the delay: clause 34.3(b). The conditions apply jointly. 21 A qualifying cause of delay is a defined term and includes, among other things, a superintendent directed variation. By letter dated 29 May 2009 the superintendent wrote to the plaintiff and its joint venture partner. He referred to the letter dated 8 February 2007 which advised of acceptance of the tender and which set out the matters that were required to be satisfied in order that practical completion of SP1 could be granted so that SP2 could then proceed. He noted that one of the matters that required satisfaction for completion of SP1 was registration of the design by the New South Wales WorkCover Authority. The superintendent then stated that "Sydney Ports acknowledges that WorkCover has varied its position and does not currently require the design to be registered." He added that the defendant was pleased to advise that the contractor could proceed with SP2. The letter did not say that the requirement for verification of the design, as distinct from registration of the design, was no longer required. There was no hint in the letter that liquidated damages would be charged for the delay in commencing SP2 which had ensued. 22 The evidence revealed that verification of the design by specialist consultants retained on behalf of the plaintiff took approximately 14 months. That was the substantial cause of the delay. After verification of the design was complete, WorkCover took only a few days to explain to the plaintiff that it no longer required registration of the design. 23 The plaintiff contends that the effect of the letter dated 29 May 2009 is that it is a superintendent directed variation within the definition of qualifying cause of delay. The defendant submits that even if it is a superintendent directed variation, it could not meet the causal requirement of clause 34.3 (a) and does not meet the notice requirements of clause 34.3 (b). 24 Although the contention that the letter amounts to a superintendent directed variation was only raised during submissions, it has an arguable basis. However, the plaintiff cannot overcome the causation and notice requirements. It is impossible to see how the effect of the letter, including the acknowledgement which it contained, could amount to a qualifying cause of delay as a result of which the contractor was delayed from reaching practical completion. Practical completion for SP2, as I mentioned, was 13 February 2008. The letter was dated 29 May 2009. Even if the letter amounted to a variation, it could not have caused the delay by the plaintiff in reaching the specified date. The true cause of the delay was the time taken by the plaintiff to obtain verification of the design by its consultants. Further, the requirement for notice pursuant to clause 34.3 (b) has not been met. The failure to do so is also fatal to the submissions of the plaintiff. 25 It therefore follows that the claim for liquidated damages is a claim which in my view satisfies the requirement of clause 5.2. The amount of the claim for liquidated damages is approximately $259,000. Notice of that claim was given on 28 June 2010.

26 The second claim on which the defendant relies is a claim for damages for defective workmanship. Defective work is covered by clause 29.3. That clause provides that if the superintendent becomes aware of work done by the contractor which does not comply with the contract, the superintendent shall, as soon as practicable, give the contractor written details thereof. It then provides that if the subject work has not been rectified or a compromise accepted by the purchaser, the superintendent may direct the contractor to do any one of a number of things. This includes the replacement or correction of the work. If the contractor fails to comply with such a direction, and the failure has not been made good within 8 days after written notice from the superintendent, the principal may have the work carried out by a third party. The cost of doing so is required to be paid by the contractor. 27 Prior to 9 July 2010, when the guarantee was called, there had been extensive communications between the parties relating to the defects alleged by the defendant. The evidence revealed numerous meetings and letters between the parties. Extensive lists of defects were compiled and provided to the plaintiff and its joint venture partner. A program for rectification was proposed. Notice was given to the plaintiff that a third party would be engaged pursuant to clause 29.3.

28 By 28 June 2010, there were 80 defects in total which had been communicated to the plaintiff. The defendant undertook an internal assessment of the cost of the rectification work which showed that the estimated cost was $423,000. The evidence included an internal recommendation seeking approval for the expenditure of $450,000 to undertake the defect rectification works. By 28 June 2010, no quotation had been obtained from any third party for the cost of carrying out the rectification works. As a result, when formal notice of the claim for damages for rectification work was given to the plaintiff on 28 June 2010, no precise amount was specified. 29 The claim for damages for defective workmanship was therefore unquantified - at least as far as the plaintiff was aware. This is the one point on which the plaintiff's case rests in relation to this issue, namely that no amount of the claim was identified and communicated to the plaintiff. The plaintiff submitted that unless a quantified claim were communicated to it by the defendant, there was no claim within the meaning of clause 5.2. I do not accept this submission. 30 It will not always be the case that a claim for damages will be capable of being quantified at the time when a principal seeks to have recourse to its security. Clause 5.2 contemplates several types of claim or entitlement. One of those is to the payment of damages. Others are for costs or an amount or debt due by the contractor. By definition, an amount or debt due by the contractor will be quantified. A claim for costs may or may not be quantified. Nor will it always be the case that a claim for damages will be quantified. In my opinion, it is not a necessary prerequisite of a valid claim for damages under clause 5.2 that it be quantified. Although in some cases the absence of quantification may suggest that the claim is specious, fanciful or untenable, it does not follow as a matter of language, logic or common sense that quantification is always necessary. In this case, the defendant had a genuine claim for damages which had been assessed internally although no amount had been finalised and communicated to the plaintiff. It was in my view a "claim" within the meaning of clause 5.2.

31 I should add that the plaintiff also relied upon the expression "the amount called upon" in the second sentence of clause 5.2 as indicating the necessity for quantification of any claim. But a moment's reflection on the whole of the second sentence indicates that the appearance of that phrase in that context does not support that contention. Where it appears in the second sentence, the phrase is a reference to the amount called down pursuant to the security and the amount which is therefore required to be the subject of any top up security.

32 Finally, my conclusion that there is no necessity for quantification of a claim for damages in order to entitle the defendant to have recourse to the security in this case is consistent with the reasoning and observations of the Full Federal Court in Clough Engineering Ltd v Oil and Natural Gas Corporation Limited (supra) at [113] to [116].

33 The third claim on which the defendant relies is a claim that, because the defendant has been in receipt of a non-complying bank guarantee since 2007, it is entitled to a claim for damages against the plaintiff which comes within clause 5.2. There was no dispute that the bank guarantee was non-complying because it specified that it only applied until 31 July 2010. The contract required it to be unlimited as to time. The defendant has not sought specific performance of the obligation to provide a guarantee unlimited as to time. Any claim for damages arising from the non-performance of this contractual obligation is entirely hypothetical. Indeed, it is difficult to see what the claim for damages might be. Ultimately, having regard to the findings I have made in relation to the first two claims, I have concluded that this aspect of the defendant's case need not be resolved. I am troubled by it. But for the reasons I have explained I need not reach a final decision.

Unconscionability 34 The last matter that I should mention is the plaintiff's reliance on the doctrine of unconscionability. It says that certain features of the conduct of the defendant and its superintendent were unconscionable in the circumstances. It is particularly concerned by the letter dated 29 May 2009 and the failure of the letter to advert to the fact that liquidated damages were accruing. In some indeterminate way, the defendant's unconscionable conduct is said to prevent it from exercising its contractual right to have recourse to the security. 35 Caution is required when equitable principles are sought to be imposed on well resourced and well advised commercial parties. In any given case, there might possibly be a proper basis to put submissions based on the equitable doctrine of unconscionability or its statutory equivalent in Section 51AA of the Trade Practices Act. However, the opportunities will be limited. That is because the state of affairs on which the application of equitable doctrines is usually predicated - vulnerability, dependence, mistaken assumption or inducement - will rarely exist in such circumstances.

36 Similar sentiments were expressed in Clough Engineering (supra) at [138]. I repeat what I said in Summer Hill Business Estate v Equititrust [2010] NSWSC 776 at [36]: In this case, the plaintiffs and the defendant were both arms length commercial parties with access to legal advice and resources. They were able to look after themselves… In these circumstances, the cautionary statement by Kirby P in Austotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) 16 NSWLR 582 at 585 is apposite: The Court has before it two groupings of substantial commercial enterprises, well resourced and advised, dealing in a commercial transaction having a great value. … This is not, of itself, a reason for denying them the beneficial application of the principles developed by equity. But it is a reason for scrutinising carefully the circumstances which are said to give rise to the conclusion that an insistence by the appellants on their legal rights would be so unconscionable that the Court will provide relief from it. At least in circumstances such as the present, courts should be careful to conserve relief so that they do not, in commercial matters, substitute lawyerly conscience for the hard headed decisions of business people.

That statement is, I think, a valuable touchstone in this area. In the choice between lawyerly conscience and the hard headed decisions of businessmen, I prefer the latter… 37 To Kirby P's caveat may be added other well known warnings. In Barnes v Addy (1874) LR 9 Ch at App 244 at 251, Lord Selborne said that there would be no better mode of undermining the sound doctrines of equity than to make unreasonable and inequitable applications of them; (approved in Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at [179]). 38 In John Alexander's Clubs Pty Ltd v White City Tennis Club Ltd [2010] HCA 19 at [101], the High Court warned that a strained application of equitable ideas does not promote justice, citing Judge Learned Hand in James Baird Co v Gimbel Bros Inc 64F 2d 344 at 346:

in commercial transactions it does not in the end promote justice to seek strained interpretations in aid of those who do not protect themselves. 39 Given the nature of this contract, its detailed terms, the sophistication of the parties involved and the policy and purpose behind unconditional undertakings and performance guarantees, I see no justification on the facts of this case to restrain the exercise by the defendant of a legal right to which it is legitimately entitled.

Cross Claim 40 The last issue requiring determination is the cross-claim. Clause 5.2 provides that if the defendant calls on any security, the plaintiff if so directed by the superintendent, shall provide further security for the amount called upon up to the limit required by the contract. The superintendent has given such a direction to the plaintiff. The plaintiff accordingly has an obligation to provide further security in the sum of $389,026.94, being 15% of the contract sum. 41 The plaintiff's response to the cross-claim is to rely upon clause 5.4: The Purchaser's entitlement to security in Item 14 shall cease as provided in Item 14(e) and upon cessation, the Purchaser shall release and return forthwith the security to the Contractor.

42 Item 14(e) makes clear that the defendant's entitlement to security in item 14(b) ceases, and must be released and returned, only when 14 days have expired after the issue of the final certificate. The final certificate has not issued. I therefore do not see any basis for a contention that the entitlement to security has ceased. The defects liability period is extant. On any view it will remain extant for at least another 12 months. For those reasons I have reached the view that the defendant is entitled to the relief which it seeks on its cross-claim. Conclusion & Orders 43 I have concluded that, as at 9 July 2010 when it called upon the bank guarantee, the defendant had "claims" within the meaning of clause 5.2, which entitled it to have recourse to the secured sum. I therefore order that the amended summons be dismissed with costs. I make order 1 pursuant to the cross-claim. I order the cross-defendant to pay the cross-claimant's costs. I also order that the security for the defendant's costs in the sum of $15,000 provided by the plaintiff pursuant to the order of the court made on 15 July 2010, as varied on 10 August 2010, be released to the defendant .

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.

CITATION : FMT Aircraft Gate Support Systems v Sydney Ports Corporation [2010] NSWSC 1108

Austotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) 16 NSWLR 582 Bachmann Pty Ltd v BHP Power New Zealand Ltd [1999] 1 VR 420 Barclay Mowlem Construction Ltd v Simon Engineering (Australia) Pty Ltd (1991) 23 NSWLR 451 Barnes v Addy (1874) LR 9 Ch at App 244 Clough Engineering Ltd v Oil and Natural Gas Corporation Limited [2008] FCAFC 136 Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 CASES CITED : Fletcher Construction Australia Ltd v Varnsdorf [1998] 3 VR 812 General Steel Industries v Commissioner for Railways (1964) 112 CLR 125 Hughes Bros Pty Limited v Telede Pty Ltd (1989) 7 BCL 210 Pearson Bridge (NSW) Pty Ltd v State Rail Authority of New South Wales (1982) 1 Australian Construction Law Reports 81 Reed Construction Services Pty Ltd v Kheng Seng (Aust) Pty Ltd (1999) 15 BCL 158 Summer Hill Business Estates v Equititrust [2010] NSWSC 776 Wood Hall Limited v The Pipeline Authority (1979) 141 CLR 443

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