Contracts - Contracts - Building, engineering and related contracts - The contract - Construction of particular contracts and implied conditions - Security and retention funds - Whether the principal can have recourse to a bond which is constituted by an unconditional bank guarantee without notice to the builder - Certification of liquidated damages by sub-independent certifier - Whether valid - Whether builder required to pay damages so certified on a provisional basis.

Building and Construction Industry Security of Payment Act 2009 (Tas).

Wood Hall Limited v The Pipeline Authority [1979] HCA 21; (1979) 141 CLR 443; Reed Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd (1999) 15 BCL 158; Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd [2008] FCAFC 136, 249 ALR 458; JKC Australia LNG Pty Ltd v CH2M Hill Companies Ltd (No 2) [2020] WASCA 112, referred to.

Second Respondent: Colin Biggers and Paisley Lawyers

Judgment Number: [2021] TASFC 11

1 I agree with the reasons for judgment of Martin AJ and the conclusion that both appeals should be dismissed.

2 I have read Martin AJ's reasons. I agree with them and do not wish to add anything. I join in the proposed orders.

3 In 2014 Hansen Yuncken Pty Ltd (the plaintiff) entered into a contract with Parliament Square Hobart Landowner Pty Ltd (the first defendant) for the construction of a stage of the Parliament Square development in Hobart. The contract provided for the appointment of a sub-independent certifier, a role filled by Wolferstan Verney and Partners Pty Ltd (the second defendant).

4 Disputes arose between the plaintiff and first defendant, and between the plaintiff and second defendant. Those disputes culminated in proceedings being issued by the plaintiff on 13 July 2020. The plaintiff sought a declaration that the first defendant was not entitled to have recourse to or to draw down on a Defects Bond, and an injunction restraining the first defendant from drawing down the Bond. In respect of the second defendant, the plaintiff sought a declaration that a Determination as to liquidated damages made by the second defendant in its role as a certifier was void.

5 The first defendant opposed the relief sought by the plaintiff and filed a counterclaim seeking an order for payment of $3.3 million (liquidated damages) pursuant to the contract. The second defendant maintained that its Determination was valid.

6 Brett J decided to conduct an early hearing with respect to three issues which his Honour regarded as "central to the overall dispute between the parties" [13]:

"(a) The first defendant's right to call upon the defects bond.

(b) Whether the second defendant certified the payment of liquidated damages in accordance with the contract.

(c) Whether cl 76.8(g)(ii) of the contract requires the plaintiff to pay the sum certified by the second defendant, notwithstanding any dispute in relation to such certification, including any dispute within the plaintiff's Type 1 notice of dispute dated 6 July 2020, or in the plaintiff's reply and defence to the counterclaim."

7 In reasons delivered on 3 March 2021, the learned trial judge found that the plaintiff had failed to make out its case. After hearing submissions from the parties, on 13 April 2021 his Honour made the following orders:

"1 The plaintiff's claim against both defendants is dismissed.

2 The interlocutory injunction made on 31st July 2020 is dissolved.

3 The plaintiff will pay the costs of each defendant in respect of the proceedings to date, including determination of the separate issues, as agreed between the parties or failing agreement to be taxed.

4 The operation of orders 1, 2 and 3 will be stayed for a period of six weeks from today (13 April 2021).

For the sake of certainty, the Court notes the intent of this order is that interlocutory injunction will remain in force for that period, in order to provide an opportunity for the plaintiff's interlocutory application, filed on 16 March 2021, to be determined by the Full Court or a single judge.

5 The Court directs that the Registrar list the said interlocutory application before the Full Court or a single judge as soon as reasonably practicable, but in any event, before the expiration of the said six week period.

6 The proceedings on the first defendant's counterclaim will be adjourned for directions hearing before his Honour Justice Brett on a date to be fixed, not before the resolution of the plaintiff's interlocutory application."

7 The parties are to attend mediation pursuant to Alternative Dispute Resolution Act 2001 before a mediator agreed by the parties.

8 On 16 March 2021 the plaintiff filed a notice of appeal. The notice identified two questions decided by the trial judge as follows:

"(a) that upon the proper constructions of the contract between the Appellant [the plaintiff] and the First Respondent [the first defendant], the [first defendant] is entitled to have recourse to the Defects Bond without notice to the [plaintiff] in the event of a bona fide dispute which dispute can relate to matters which arise prior to Stage Practical Completion, including those referred to in the demand for payment made by the [first defendant] in its correspondence of 3 July 2020; and

(b) that the issue of a payment claim by the [plaintiff] under clause 42B of the contract is not a necessary pre-condition to certification of liquidated damages under clause 76.8(g) of the contract (and to the consequent payment of liquidated damages by the [plaintiff]) and that in consequence the [second defendant] validly certified the payment of liquidated damages in accordance with the contract."

9 The plaintiff's grounds of appeal are as follows:

"1 At [32] his Honour rejected [the plaintiff's] argument that resort to the Defects Bond is limited to the circumstances prescribed by clause 76.1 of the contract and at [33] rejected the argument of the [first defendant] that the provisions of clauses 6.1 - 6.5 of the contract applied to the Defects Bond. Having proceeded in that way, his Honour then erroneously determined at [33] and [35] that the [first defendant] may have recourse to the Defects Bond without there being a contractual right to do so in the circumstances;

2 Upon a proper construction of the contract, and having determined at [33] that the Defects Bond is separately treated from the Performance Bond and that in consequence clauses 6.1 - 6.5 of the contract do not apply to it, his Honour ought to have concluded that the only contractual right of the [first defendant] to have recourse to the Defects Bond is pursuant to clause 76.1 of the contract;

3 At [47 - 48] his Honour wrongly construed clause 76.8(g) of the contract as not erecting a necessary condition precedent to the power of the [second defendant] to certify liquidated damages; namely, the submission of and determination of a payment claim in accordance with clause 42B of the contract;

4 At [51], having wrongly construed clause 76.8(g) of the contract, (as described at paragraph 3 above), his Honour did not determine the question of whether [the plaintiff] is required to pay the sum certified by the [second defendant] notwithstanding a dispute about the [second defendant's] power to do so (given the question fell away on his Honour's findings at [47 - 48])."

10 The plaintiff seeks the following orders and declarations:

2 That pursuant to rule 559, the separate questions be answered as follows:

(a) (first question) what is the [first defendant's] right to call upon the security provided by the [the plaintiff] under the Construction Contract - Stage 1A dated 5 December 2014 (Contract)

Answer: the [first defendant], has no right to call upon the security.

(b) (second question) whether the [second defendant] (the Sub-IC) certified the payment of liquidated damages in accordance with the Contract.

Answer: the [second defendant], the Sub-IC, did not certify the payment of liquidated damages in accordance with the Contract.

(c) (third question) whether clause 76.8(g)(ii) of the Contract requires the [plaintiff] to pay the sum certified by the [second defendant] notwithstanding any dispute in relation to such certification (including any dispute within the [plaintiff's] Type 1 Notice of Dispute dated 6 July 2020 (Type 1 Notice of Dispute) or in the [plaintiff's] Reply and Defence to Counterclaim (Defence to Counterclaim)).

Answer: the [plaintiff]is not required by clause 76.8(g)(ii) of the Contract to pay the sum certified by the [second defendant] given the dispute as to the [second defendant's] jurisdiction to do so in the circumstances.

3 That the [first defendant] and [second defendant] pay the costs of this appeal and the costs of the determination of the separate questions before the primary Judge."

11 The first defendant has also appealed in respect of the orders made by the learned trial judge on 13 April 2021. In a notice filed on 23 April 2021, the first defendant appealed against his Honour's determination that he ought not enter judgment on the counterclaim, and against the order that the proceedings on the counterclaim be adjourned for a directions hearing. The grounds of the first defendant's appeal are as follows:

"1 Upon the trial of separate issues in the proceeding his Honour found (the findings) in his reasons delivered on 3 March 2021 that:

(a) the Second Defendant (in the proceeding) did certify the payment of liquidated damages in accordance with the (relevant) contract (at [50]);

(b) clause 76.8(g)(ii) (of the relevant contract) makes it clear that the contract envisages that liquidated damages will be actually paid by the contractor [the Respondent] upon certification by the sub-independent certifier, albeit on a provisional basis and without a final determination of any dispute relating to it (at [49]); and

(c) clause 76.8(g)(ii) of the contract does require the plaintiff [the Respondent] to pay the sum certified by the second defendant, notwithstanding the existence of a Type 1 dispute in that regard (at [51]).

His Honour, having so found on 3 March 2021, ruled that the 'question raised on the defence to the counterclaim [had] not been fully resolved by my [3 March 2021] determination' (transcript 30:20-22) and his Honour could not enter judgment on the Appellant's (the First Defendant's) counterclaim as '[t]he estoppel claim,..., requires determination before the counterclaim can be resolved' (transcript 30:25-6) (ruling).

1. it is inconsistent with his Honour's findings set out in paragraphs 1(a) to (c) above;

B the findings finally and fully dispose of all issues in the counterclaim; and

C paragraphs 11(b) to 53 of the Respondent's defence to counterclaim:

(i) upon the findings set out in paragraphs 1(a) to (c) above, are subject to the operation of clause 76.8(g)(ii) of the relevant contract; and

(ii) do not raise an arguable defence to the counterclaim."

12 The first defendant seeks that order 6 made on 13 April 2021 be set aside and that judgment on the counterclaim be entered in favour of the first defendant.

13 For the reasons that follow, in my view both appeals should be dismissed.

14 The background and essential features of the contract were helpfully summarised by the trial judge in Hansen Yuncken Pty Ltd v Parliament Square Hobart Landowner Pty Ltd [2021] TASSC 7 at [1]- [13]:

"1 This case concerns disputes which have arisen between the parties to the contractual arrangements in respect of the construction of a stage of the Parliament Square development, in particular that related to the construction and fitting out of the Salamanca building and a building linking the Salamanca building to Parliament House. The plaintiff is the head construction contractor, and the first defendant is the principal. It has that role as trustee for the entity which owns or, at least, controls the land.

2 The construction contract (the contract) was entered into by the plaintiff and the first defendant on 5 December 2014. It was amended by deed dated 15 December 2016. The contract provides for the plaintiff to undertake and complete two categories of work, project works which relate to the construction of the building, and fit-out works which involve the completion of its interior. Provision is made for the contract sum to be paid by way of progress payments, and for variation of the sum in respect of any changes to the schedule of works. Timeframes are established for the performance of the works. Provision is made for payments to the plaintiff in respect of delay in certain circumstances, and the payment of liquidated damages by the plaintiff to the first defendant in the event of delay to the completion of the project not otherwise excused or authorised under the contract.

3 The contract provides for various matters such as payment claims, variations to the works and to timing, and compensation for delay to be assessed and determined by an entity known as the sub-independent certifier. By definition, this role is filled by the second defendant. The sub-independent certifier is engaged and paid by the principal but is required 'to act honestly reasonably and impartially as an independent certifier to the principal and the contractor for the purposes of any decision, function or task' within its responsibility. By virtue of relevant provisions in the contract, the plaintiff and the first defendant entered into a deed with the second defendant in a form provided by a schedule to the contract, which confirmed the sub-independent certifier's functions and the requirement of independence. This is known as the sub-independent certifier deed.

4 Completion of the works is an event described in the contract as stage practical completion. The achievement of stage practical completion is a matter determined by the second defendant. It takes place when the second defendant issues a certificate to that effect. At that point, possession of the site is handed back to the first defendant and the contract moves into a phase described as the defects liability period. This period is fixed at 12 months but may be extended in certain circumstances. During that time, the plaintiff is required to remedy defects and omissions in the works identified either in the certificate of stage practical completion, or otherwise during the defects liability period.

5 As is usual in such contracts, the plaintiff is required to provide security in respect of the performance of its obligations under the contract. Up to the date of stage practical completion, security is to be provided by a combination of bank guarantee in the amount of 5% of the contract sum and an insurance bond in the amount of 2.5% of the contract sum. These are termed 'performance bonds'. At stage practical completion, the performance bonds are to be exchanged for a bank guarantee in the amount of 2.5% of the contract sum, known as the 'defects bond'. The form of the bank guarantee and insurance bond constituting these securities is set out in a schedule to the contract. That form in each case makes it clear that it is an unconditional and irrevocable promise by the relevant bank to pay on demand any sum demanded by the first defendant during its currency.

6 In accordance with these requirements, prior to the commencement of the works, the plaintiff provided the performance bonds to the first defendant. The bank guarantee component was comprised of two separate guarantees, each for 2.5% of the contract sum. The certificate of stage practical completion was issued by the second defendant on 20 September 2017. Between stage practical completion and 3 November 2017, the first defendant returned the insurance bond and one bank guarantee to the plaintiff, but retained the remaining bank guarantee in the sum of 2.5% of the contract sum which it agreed to hold as the defects bond during the defects liability period. It seems that the parties had agreed that this would, in practical terms, amount to the exchange of the bonds required under the contract. The defects liability period is still extant, and the first defendant still holds the defects bond.

7 Over the course of the works, disputes have arisen between the parties in respect of amounts to which each claims to be entitled under the terms of the contract. These include payments and adjustments associated with alleged variations of the work and claims relating to alleged delay in the completion of the works, and for extensions of time in that regard. On 26 July 2019, the plaintiff made an adjudication application pursuant to the Building and Construction Industry Security of Payment Act 2009 in respect of some of the matters in dispute. On 9 September 2019, the adjudicator determined that the plaintiff was entitled to the sum of $5,310,429.54 in respect of the issues raised in that adjudication. On 18 October 2019, the first defendant commenced proceedings in this Court seeking relief which included quashing the adjudication. On 3 July 2020, Estcourt J rejected the first defendant's application.

8 On 23 June 2020, while those proceedings were pending, the first defendant requested the second defendant to certify that the plaintiff was liable to pay liquidated damages for delay in achieving stage practical completion. The asserted delay had been a longstanding issue between the parties, but there had not previously been certification, or a request for certification, of liquidated damages arising from this issue. The contract provided for the sub-independent certifier to assess and certify liquidated damages. On 29 June 2020, the second defendant certified that liquidated damages in the sum of $3,330,000 were payable by the plaintiff. The calculation of those damages was in respect of a delay of 222 days, from 10 February 2017, the day assessed by the second defendant to be the completion date under the contract, and 20 September 2017, the date of actual stage practical completion. The certificate purportedly gave rise to a negative progress payment, which is a matter which I will discuss later in these reasons.

9 On 3 July 2020, the same day on which Estcourt J rejected the first defendant's bid to quash the adjudication, the first defendant, by way of correspondence from its project manager, demanded payment from the plaintiff in respect of four matters which had been the subject of dispute between the parties, as already discussed. These were:

(a) The payment of $3,330,000 by way of liquidated damages, as already described.

(b) The payment of $578,033.53 alleged as overpayments arising from variations to the work.

(c) The payment of $93,240 as liquidated damages arising from a shortfall in the minimum lettable area achieved on completion of the contract.

(d) The payment of $723,655.47 being asserted over-payments in respect of fit out works.

10 In each case, the correspondence demanded payment by 10 July 2020.

11 There was then a course of correspondence between the parties which eventually led to the commencement of this action. In that correspondence, the plaintiff denied liability for the monies demanded by the first defendant and demanded that the first defendant provide an undertaking that it would not have recourse to the defects bond in order to satisfy the demands made by it. The first defendant refused to provide that undertaking.

12 On 13 July 2020, the plaintiff commenced this action and sought the following relief:

(a) A declaration that the first defendant has no present entitlement to have recourse to or draw down the defects bond, and an injunction restraining it from doing so in order to satisfy any of the claims set out above.

(b) Declarations that the second defendant did not have power to make the determination in respect of liquidated damages, and declaring the determination void.

13 Subsequent to the commencement of the action, I granted an interlocutory injunction preventing the first defendant from having recourse to the defects bond. The interlocutory injunction was granted purely as a practical measure, and did not involve any determination of the merit of the plaintiff's case. The practical circumstances involved the Court offering, and the parties accepting, an early hearing in respect of certain defined issues which are central to the overall dispute between the parties. Those issues are the subject of an order by me pursuant to r 559 of the Supreme Court Rules 2000, that they be heard and determined before each other issue in the action. The specific issues are:

(a) The first defendant's right to call upon the defects bond.

(b) Whether the second defendant certified the payment of liquidated damages in accordance with the contract.

(c) Whether cl 76.8(g)(ii) of the contract requires the plaintiff to pay the sum certified by the second defendant, notwithstanding any dispute in relation to such certification, including any dispute within the plaintiff's Type 1 notice of dispute dated 6 July 2020, or in the plaintiff's reply and defence to the counterclaim."

15 It is common ground that at the heart of the resolution of the issues is construction of the contract. The broad principles to be applied in construing contracts are not in dispute and were conveniently summarised by the trial judge:

"There is no controversy concerning the general principles to be applied with respect to the construction of the contract. Once again, the case of JKC Australia LNG Pty Ltd v CH2M Hill Companies Ltd [No 2], contains a convenient summary, drawing upon principles restated by the High Court in Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7, 251 CLR 640 [35] and Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37, 256 CLR 104 [46]‑[52]. The pertinent part of that summary is as follows:

'1 The rights and liabilities of parties under a provision of a contract are determined objectively by reference to its text, context (the entire text of the contract) and purpose.

2 In determining the meaning of the terms of a commercial contract it is necessary to ask what a reasonable business person would have understood the terms to mean. That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purposes or objects to be secured by the contract.

3 The court approaches the task of giving a commercial contract an interpretation on the assumption that the parties intended to produce a commercial result - one which makes commercial sense. (This has been said to require that the construction to be placed on the relevant provision be consistent with the commercial object of the agreement.) Thus a commercial contract should be construed so as to avoid it making commercial nonsense or working commercial inconvenience.'"

16 The plaintiff's general construction obligations are set out in clause 36 of the contract. As to security to be provided by the contractor in respect of its obligations, prior to completion of the constructions works (signalled by the second defendant issuing a certificate of "Stage Practical Completion"), security is provided by a Performance Bond. The contract provides that Performance Bond "means" a bank guarantee in the amount of 5% of the contract sum, plus an insurance bond in the amount of 2.5% of the contract sum.

17 Following the issue of a certificate of Stage Practical Completion, the insurance bond is returned to the plaintiff and the bank guarantee of 5% is "exchanged" for a Defects Bond. The contract provides that Defects Bond "means" a bank guarantee in the amount of 2.5% of the contract sum. Following Stage Practical Completion the first defendant returned the insurance bond, but retained the bank guarantee as the Defects Bond to be held during the Defects Liability Period.

18 The security requirements of the contract are found in Part C which is headed "Contractor's Project Obligations". Part C commences with clause 6:

(a) The Contractor must deliver to the Principal prior to Financial Close the Performance Bonds in favour of the Principal and the National Australia Bank Ltd ('Beneficiaries').

6.3 New Performance Bond on rating downgrade or loss of licence

(a) If an institution providing a Performance Bond ceases to have a Minimum Credit Rating, the Contractor must, within 20 Business Days, provide a replacement Performance Bond that is issued by a complying institution and that otherwise complies with the same requirements as the Performance Bond which it replaces.

(i) An institution providing a Performance Bond ceases to have a Minimum Credit Rating;

(ii) At that time none of the four major Australian trading banks have the Minimum Credit Rating; and

(iii) The provider has a rating which is less than the second highest rated major Australian trading bank at that time.

(iv) the Contractor must provide a replacement Performance Bond that is issued by an institution which has a rating that is not less than the higher of:

(A) the second highest rated major Australian trading bank at that time; and

(a) The Principal may draw down on any Performance Bond at any time without notice if:

(i) the Principal has a bona fide Claim against the Contractor under or in connection with the Contract;

(iii) the Principal is entitled to terminate this Deed due to a default by the Contractor; or

(iv) the Contractor has failed to replace any Performance Bond when required under this Deed.

(b) If the Principal draws down on a Performance Bond:

(i) the proceeds received are not held on trust for the Contractor;

(ii) the Beneficiaries are not obliged to pay any interest on that amount;

(iii) the Principal must provide details of all expenditure of the proceeds to the Contractor;

(A) if this Deed is not terminated, for the period of time and in the amounts as though they were Performance Bonds;

(aa) in accordance with clauses 76A, 77 or 77A; but

(ab) in the case of termination for Contractor default, until all liabilities of the Contractor to the Principal and the Beneficiaries in connection with this Deed have been discharged.

The Contractor may not take steps to injunct or otherwise restrain:

(a) the issuer of a Performance Bond from paying the Principal the proceeds of the Performance Bond;

(b) the Principal from drawing down on a Performance Bond; or

(c) the Principal from using the proceeds received from drawing down on a Performance Bond,

subject to the Principal having acted in accordance with clause 6.4.

(a) The Performance Bond that consists of the insurance bond of 2.5% of the Contract Sum will be returned to the Contractor within 5 Business Days of the issue the Certificate of Stage Practical Completion.

(b) The Performance Bond that consists of the Bank Guarantee of 5% of the Contract Sum will be exchanged for the Defects Bond within 5 Business Days of the Contractor's compliance with clause 36.4(g).

(c) Subject to paragraph (c) below, the Defects Bond will be returned within 5 Business Days of the issue of a certificate under clause 68.4.

(d) If the Defects Liability Period is extended more than 12 months in relation to any works to make good an omission or defect in the Works, at the expiry of the original Defects Liability Period the Contractor may replace the Defects Bond with a Bank Guarantee for the value of the cost of rectifying those works that are subject to the extended Defects Liability Period (that value as determined by the Sub-Independent Certifier)."

19 Clause 6 is of critical importance to the resolution of the contested issues. The following points are of significance:

• Two types of security are identified in s 6. A Performance Bond (applying during construction), and a Defects Bond (applying after completion of construction and during the Defects Liability Period).
• Clause 6.4 provides that the first defendant "may" draw down on any Performance Bond, "at any time without notice", if the first defendant possesses a "bona fide Claim"[1] against the first defendant.
• The proceeds drawn down are "not" held on trust for the plaintiff and, although the first defendant must provide to the plaintiff details of all expenditure of the proceeds, it is not obliged to pay interest on the proceeds.
• Clause 6.4(b), (c) and (e) impose specific obligations on the first defendant following a draw down on a Performance Bond.
• Clause 6.5 provides that the plaintiff is not permitted to take steps "to injunct or otherwise restrain" the issuer of the Performance Bond from paying the plaintiff the proceeds of the Bond, or to restrain the first defendant from drawing down on a Performance Bond.
• These restraints on the plaintiff in clause 6.5 are expressly subject to the first defendant "having acted in accordance with clause 6.4".
• After the issue of a Stage Practical Completion certificate, and after the plaintiff complies with clause 36.4(g) by delivering appropriate warranties, the insurance bond portion of the Performance Bond is returned to the plaintiff, and the bank guarantee portion of 5% is "exchanged" for the Defects Bond which consists of a bank guarantee of 2.5%.[2]
• In the context of detailed provisions within clause 6 concerned with the circumstance in which the first defendant "may" draw down on a Performance Bond, and restraining the plaintiff from preventing such a draw down, clause 6.6 deals with the Defects Bond without any reference to the circumstances in which the first defendant is entitled to call upon the Defects Bond.

20 The contract provides for a Defects Liability Period which "means" each of the following periods:

"(a) in relation to the Works, the period of 12 months commencing on the Date of Stage Practical Completion; and

(b) in relation to any works to make good an omission or defect in the Works, the period of 12 months commencing on the date of rectification of that omission or defect."

21 Clause 6.6(c) provides that subject to the Defects Liability Period being extended, the Defects Bond will be returned within 5 business days of the issue of a certificate under clause 68.4. In essence, clause 68.4 provides for the issue of a certificate, within one month after the expiry of each Defects Liability Period "under the Development Agreement"[3], stating that in the opinion of the independent certifier, all known defects in or omissions from the Works[4] "under the Development Agreement", which relate to the Defects Liability Period, have been rectified.

22 As to the rectification of defects, throughout the construction and Defects Liability Period, clause 68 provides for the first defendant to give notice of defects in or omissions from the Works at any time before the end of the Defects Liability Period, and specifies that the plaintiff must make good the defects or omissions as soon as practicable, or in any event, within 7 business days of becoming aware of the defect or omission. In addition, the plaintiff must rectify any defects or omissions identified in the Certificate of Stage Practical Completion.

(a) The Principal may at any time , and from time to time , before the end of the Defects Liability Period give notice in writing to the Contractor specifying defects in or omissions from the Works.

(b) Subject to this clause 68.1, the Contractor must, during and following the carrying out of the Works, make good any defects in or omissions from the Works that it becomes aware of and, subject to clause 68.2(b), must do so as soon as practicable, but in any event within 7 Business Days (or such longer period determined in writing by the Independent Certifier under the Development Agreement having regard to the nature of the defect or omission) , after becoming aware of the defect or omission.

(c) As soon as possible after the Date of Stage Practical Completion , the contractor must rectify any defects in or omissions from the Works notified prior to or as set out in the Certificate of Stage Practical Completion.

(d) The Contractor must, during the Defects Liability Period, make good any defects in or omissions from the Works that it becomes aware of at its cost and, subject to clause 68.2(b), must do so as soon as practicable, but in any event within 7 Business Days (or such longer period determined in writing by the Independent Certifier under the Development Agreement having regard to the nature of the defect or omission), after:

(ii) the Principal notifying the Contractor of the defect or omission.

(e) The Contractor must, when carrying out any works to rectify any defects in or omissions from the Works, comply with its obligations under this Deed in relation to carrying out of any Works."

24 Clause 68.2 deals with any defect or omission in a building occupied by the Crown or the Crown's agent or in respect of Fitout Works. As discussed earlier, clause 68.4 concerns certification that defects or omissions relating to the Defects Liability Period have been rectified. If the Certifier determines that defects or omissions have not been rectified, clause 68.4 provides for rectification and procedure to be followed in the event of a dispute.

25 Clause 68.5 provides that if the plaintiff fails to properly make good on known defects or omissions, the first defendant may carry out rectification works for which the plaintiff must pay or reimburse the first defendant.

26 Clause 69 concerns the issue of a "final certificate" after the issue of a certificate under clause 68.4 and after the delivery by the plaintiff to the first defendant of a deed of release.

27 Clause 70 concerns the duty of the plaintiff to carry out the Works in a manner which does not result in the first defendant suffering any loss or damage to Crown property. Other clauses that follow concern insurance and the plaintiff's indemnity to the first defendant.

28 In this context, clauses 75 and 76 deal with the consequences of a "Default Event". The plaintiff relies on these clauses as identifying the only basis upon which the first defendant is entitled to have recourse to the Defects Bond.

"Default Event means each of the following events:

(a) a failure by the Contractor to comply with any provision of this Deed or any other Project Document;

(d) the occurrence of a Construction Activity Default; and

(e) a representation or warranty given by the Contractor under this Deed or any other Project Document being or becoming incorrect or misleading in any respect."

30 Clause 75 concerns the first defendant giving notice to the plaintiff of a Default Event and the obligation of the plaintiff to remedy the Default Event:

If a Default Event occurs, the Principal may give the Contractor a notice in accordance with this clause 75.1 (Default Notice). A Default Notice must:

(a) state that it is a Default Notice under this clause 75.1; and

(a) Subject to clause 75.2(b) and clause 75.3, upon receipt of a Default Notice the Contractor must remedy (to the extent that it is capable of being remedied) the Default Event specified in the Default Notice within the Remedy Period.

(i) no Remedy Period applies in respect of a Financial Default;

(ii) no Remedy Period applies in respect of an Insolvency Event;

(iii) no Remedy Period applies in relation to a Construction Activity Default in respect of which the Principal elects to give a Construction Activity Default Notice; and

(iv) no Remedy Period applies in respect of a Default Event that is not capable of being remedied."

31 Clause 75.3 is concerned with an extension to the remedy period.

32 Clause 76 provides for remedies available to the first defendant in respect of Default Events, including recourse to the Defect Bond:

If a Default Event has occurred and the Default Event is:

(a) capable of being remedied and is not remedied by the Contractor to the Principal's satisfaction (which may include the payment of compensation) within the Remedy Period;

(b) a Financial Default and is not remedied by the Contractor within three Business Days of receipt of the Default Notice specifying the Financial Default;

the Principal may (in addition to any other Rights under this Deed, any other Project Document or at Law) do any, or a combination of any of, the following :

(e) subject to clause 6, have recourse to any or all of the Performance Bonds and the Defects Bonds for the purpose of paying to the Principal any Performance Bond Secured Amounts;

(g) in respect of a Material Default only, terminate this Deed;

(i) if the Default Event occurs prior to the date the Final Certificate is given, exercise the Principal's step-in and step-out Rights as set out in clause 76.5;

(k) exercise or enforce its Rights under clause 76.2

76.2 Rights and liabilities of parties following termination by Principal

(a) If the Principal terminates this Deed pursuant to clause 76.1(g) , the Principal may (in addition to any other Rights under this Deed, any other Project Document or at Law) do any or a combination of any of the following:

(i) have recourse to any or all of the Performance Bonds an [sic] Defects Bonds for the purpose of paying to the Principal any Performance Bond Secured Amounts;

(B) assign or novate to the Principal or its nominee any contract (including any subcontract, supply agreement or consultancy agreement) entered into by the Contractor for the purposes of the performance of the Works;

(D) deliver to the Principal all Design Documentation in such form (including software) and organised to the satisfaction of the Principal's Representative; and

(E) make available all materials, equipment, machinery and supplies located on the Site for use by the Principal and its nominees in the completion of the Works.

(b) Subject to clause 76.3(b)(ii), no compensation of any kind is payable by the Principal to the Contractor in respect of the termination of this Deed pursuant to clause 76.1(g)." (My emphasis.)

33 The "Remedy Period" within which a Default Event must be remedied is defined as meaning 15 business days from and including the date of service of the default notice, and any extended period granted under clause 75.3. If an extension is granted, the plaintiff is required to provide to the first defendant a remedy plan which is defined as including the time required to cure the Default Event and a work plan setting out each task to be undertaken.

34 It is contended by the plaintiff that the first defendant may only have recourse to the Defects Bond if clause 76 is engaged, and such engagement can occur only if notice of a Default Event has been given in accordance with clause 75.

Recourse to the Defects Bond - reasoning of the trial judge

35 The trial judge noted the definition of "bank guarantee" as meaning an "irrevocable, unconditional guarantee", and that the form in Schedule 4 is consistent with the definition. The guarantee provided that the bank "unconditionally undertakes to pay on demand any sum or sums which may from time to time be demanded" by the first defendant. Further, it provided that upon notice in writing from the first defendant of a desire for payment of the whole or part of the maximum sum guaranteed, "it is unconditionally agreed that such payment or payments will be made to [the first defendant] forthwith without reference to the [plaintiff] and notwithstanding any notice given by the [plaintiff] to [the bank] not to pay the same".

36 After considering clauses 6.1-6.5 in connection with Performance Bonds, the trial judge correctly concluded that the Performance Bond is intended to "allocate risk". Having observed that in contrast to the Performance Bond, there were no provisions in clause 6 dealing with the circumstances in which the first defendant might draw down on the Defects Bond, his Honour said at [22]:

"However, the Defects Bond itself is in the same form as the Performance Bond, that is an irrevocable and unconditional promise by the bank to pay monies under the bond to the first defendant upon demand, and notwithstanding any objection from the plaintiff."

37 The trial judge noted the argument for the plaintiff that the differential treatment of the Performance and Defects Bonds in clause 6, and the exchange of one for the other at the time of practical completion, led to an interpretation that the Defects Bond "is intended simply to operate as security for the performance by the plaintiff of its obligations during the Defects Liability Period". After referring to clauses 75 and 76, his Honour addressed the plaintiff's contention that the only right of the first defendant to drawn down on the Defects Bond arises from these provisions, and the first defendant was only entitled to recourse to the Defects Bond if it followed the steps in those clauses, including serving a Defect Notice on the plaintiff.

38 The trial judge found that the reasoning underpinning the plaintiff's contention involves a "negative stipulation" that the first defendant could not have recourse to the bond other than in accordance with the provisions in clauses 75 and 76. In his Honour's view, having regard to the bank guarantee, [27]:

"The unconditional and irrevocable nature of the bond it not consistent with the right to have recourse to the Defects Bond being limited to the express provision contained in clause 76.1(e). The bond is 'as good as cash' and this in turn suggests that the Defects Bond is intended to have an operation outside that specified in clause 76.1(e)."

39 Referring to the plaintiff's submission that the primary, if not exclusive, function of the Defects Bond is to operate as security for the performance by the plaintiff of his obligations during the Defects Liability Period, his Honour found that this purpose is "inconsistent with access to the bond by the first defendant being limited to the circumstances prescribed by clause 76.1." His Honour's reasons continued [28]:

"This is because it is extremely unlikely that clause 76 is intended to regulate or, indeed, have anything to do with, the relationship of the parties during that period, other than in a general way applicable to the contract as a whole. It certainly is unlikely to apply to the rectification of defects and omissions identified before or during that period."

40 The trial judge observed that the operation of clause 76.1 is triggered by a Default Event. His Honour noted that although the definition included a failure by the contractor to comply with any provision of the contract, which words could include defects in construction, the remainder of the definition referred to matters which have "little, if anything, to do with the day to day operation of the Defects Liability Period", and "do not include within their scope, a defect or omission which is the trigger for the contractor's obligation to perform remedial work during [that] period" [29]. His Honour was there having regard to the definitions of Material Default, Financial Default and Construction Activity Default. None of those matters relate to defects or omissions in construction.

41 The trial judge determined that clause 68 provides a "discrete process" for the rectification of "defects in or omissions from the works". His Honour then concluded that it is "abundantly clear" that the remedies prescribed by clause 76 "are intended to have little, if anything, to do with the operation of the Defects Liability Period". His Honour's reasons continued [30]:

"[30] ... Firstly, it is not at all clear that the trigger for the contractor's liability under cl 68, 'defects in or omissions from the works' falls squarely within the definition of default event. It may do so, but it can also be envisaged that such a defect or omission may not necessarily constitute 'a failure by the contractor to comply with any provision of this deed'. It certainly does not fall under the definition of a material, financial or construction activity default. Further, resort to cls 75 and 76 is both unnecessary and inconsistent with the rights of the first defendant under cl 68. The requirement under that clause is for rectification within 7 days and, in some cases, 24 hours. It is clearly not intended that resort be had to a default notice and a 15 business day remedy period, which in effect extends to three weeks or longer, under cl 75. The rectification of defects is regulated by cl 68. There is nothing in that clause that explains or affects the operation of the defects bond.

[31] There is no question that the defects bond can be resorted to under the express provisions of cl 76.1(e). However, that clause is intended to make all relevant and outstanding security available for recourse by the first defendant in the specific circumstances referred to in that provision. It does not give rise to a negative stipulation or, as Mr McElwaine framed it, the only express provision for recourse to the defects bond. In my view, cl 76.1 is of little relevance to the construction of the contract with respect to the operation of the defects bond generally.

[32] Accordingly, I reject Mr McElwaine's submission that resort to the defects bond is limited to the circumstances prescribed by cl 76.1. If that were the case, then the defects bond would have no work to do with respect to the operation of the defects liability period, in particular under cl 68, even simply as security for the performance of the contractor's obligations during that period. This cannot have been the intention of the parties."

42 The trial judge then explained his ultimate conclusions [33] - [36]:

"[33] On the other hand, I do not accept Mr Twigg's submission that the express provisions of cl 6.1 to cl 6.5 apply to the defects bond. In my view, the separate definition of performance bond and defects bond, and the express provisions of cl 6.6, which deal exclusively with the defects bonds, evince a clear intention of the parties to treat the defects bond separately to the performance bond. It is difficult to explain why the drafter of the contract would not have made express provision for the operation of the defects bonds, given the choice to do so in respect of the performance bond, but this does not mean that the intention of the parties cannot be discerned from the terms of the contract as a whole. In my view, the critical matter informing the intention of the parties with respect to the defects bonds arises from the definition of defects bond, and, in particular, the formulation of the bank guarantee by which it is constituted under that definition. I reiterate the discussion from Fletcher Constructions relating to this question, which is set out above. Given the prescribed form of the defects bond, it is clear that it was intended to have the risk allocation function referred to in the cases already discussed. In particular, I conclude that it was intended to be available to the first defendant in the event of a bona fide dispute arising during the defects liability period. The purpose of such recourse is to ensure that the first defendant is not out of pocket pending the resolution of such a bona fide dispute. In accordance with judicial observations in the cases discussed above, this is consistent with an intention that the first defendant may have recourse to the bond, in the event of such a dispute, without reference to the plaintiff, and without demonstrating to anyone, including the Court, the merits of the dispute. This interpretation sits comfortably with the provisions of cl 68, including those which permit the first defendant, in certain circumstances, to undertake the work and recover the cost from the contractor.

[34] A further question is whether for a dispute to be a bona fide one, justifying recourse to the bond, it must legitimately arise only in respect of the operation of the defects liability period, or whether it can extend to the type of dispute which had its genesis well before the date of stage practical completion, as reflected in the demands made by the first defendant's correspondence to the plaintiff, as discussed above. This includes, of course, the claim for liquidated damages.

[35] In my view, it is clear that a bona fide dispute and consequent recourse to the defects bond, may include subject-matter of this nature. Despite the inadequacies of the drafting of the contract, it is clear enough that the intended risk allocation continues in respect of any bona fide dispute arising under the contract at any time. The important distinction between the performance bond and the defects bond is the lesser quantum of security provided by the latter. This is consistent with a prediction by the parties that, during the defects liability period, the type of dispute which may trigger recourse to the bond is likely to give rise to a need for a lesser quantum of security. I do not think that there is an intention to make any other distinction. It is certainly not the case that this prediction is intended to restrict the risk allocation role of the defects bond. This is consistent with the express inclusion of a defects bond in the monies available to satisfy a liability arising pursuant to cl 76.1. It is also relevant that the calculation of liquidated damages, which arises pursuant to cl 76.8, can realistically only be undertaken after the date of stage practical completion. There is nothing in the contract, when read as a whole, to suggest that the parties intended to exclude a dispute about this matter from security recourse under the defects bond. However, the money available to give effect to the risk allocation is simply reduced after stage practical completion.

[36] Accordingly, I am satisfied that the first defendant is entitled to have recourse to the defects bond without notice to the plaintiff, in the event of a bona fide dispute. That dispute can relate to matters which arise prior to stage practical completion, including those referred to in the demand for payment made in the first defendant's correspondence dated 3 July 2020."

43 In summary, the written submissions of the plaintiff advance the following contentions:

• "The contract draws a plain textual and contextual distinction between the Performance Bond and the Defects Bond".
• It is significant that within clause 6 are express provisions dealing with drawing down on the Performance Bond, and prohibiting the plaintiff from restraining the draw down, but similar entitlements on the first defendant and similar restraints on the plaintiff are not expressed in clause 6.6 with respect to the Defects Bond.
• Default Events are defined widely as including a failure to comply with a provision in the contract. The only right possessed by the first defendant to have recourse to the Defects Bond "is that conferred by clause 76.2(e) which is conditional upon the occurrence of a Default Event and the issue of the Default Notice pursuant to clause 75.1".
• "If there is no relevant difference between the Defects Bond and Performance Bond (the former being embraced within the latter), then the exchange mechanism at clause 6.6(b) makes no sense: Performance Bond cannot be exchanged for a Defects Bond if the two are one in the same thing".
• "In rejecting the appellant's construction arguments, the primary judge erroneously strayed from the plain textual and contextual meaning of the clauses in issue by reference to general considerations of risk allocation which in turn led him to erroneously conclude at [33] that, despite the distinction between the Performance Bond and the Defects Bond, the purpose of provision of the security required the conclusion that the first respondent may access the Defects Bond simply in the event of a bona fide dispute. That reasoning is inconsistent with the division of risk in this Contract. Clause 6 does not confer a right to access the Defects Bond where the first respondent has a bona fide dispute. The definition of Performance Bond does not embrace the Defects Bond. The only express reference to a right to access the Defects Bond is at clause 76.1(e). It must follow that there is no general right to do so, which is the conclusion of the primary judge."

44 In oral submissions, counsel for the plaintiff submitted that the approach of the first defendant in asking whether there is a qualification to the right to call upon the unconditional guarantee is the incorrect approach. Counsel contended that the question is "very simple", namely, "what is the right of the first defendant to call on the Defects Bond?" The answer given by counsel was that the right exists only if clause 76 is engaged.

45 In this context, the plaintiff submitted that the contract under consideration between the parties is different from the contracts considered by the authorities upon which the trial judge relied. In particular, counsel contended that the trial judge erred in reasoning by "analogy" from judicial statements made in Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812 and Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd [2008] FCA 191, 249 ALR 458.

46 In Wood Hall Limited v The Pipeline Authority [1979] HCA 21; (1979) 141 CLR 443, the High Court was concerned with a construction contract which provided that a contractor would, at the time of the execution of the contract, pay $1.5 million cash to the owner as security for the contractor's "due and faithful performance of the Work". The contract also provided that, as an alternative to cash security, the contractor could provide a bank guarantee. The parties agreed that a bank guarantee given by the bank pursuant to an earlier contract could be provided as the security. Additional guarantees were also provided

47 The bank guarantee provided that the bank would unconditionally pay on demand any sums which might be demanded from time to time by the owner.

48 The owner took deliberate steps to conceal from the contractor its intention to make demand upon the bank, and made the demand for payment in full of the amounts payable under each of four bank guarantees. Demand was made in the context of serious disputes between the parties. Gibbs J identified the ultimate question as whether the bank was bound to make payment under the guarantees, or whether the action of the owner in making the demands constituted a breach of contract. The contractor argued that the obligation of the bank to make payment was "conditional upon the making of a demand by the Authority in circumstances in which the Authority had a right under the contract to make such a demand ie after the contractor had committed a breach of its primary obligations under the contract." (450)

49 Gibbs J found that on the proper construction of the guarantees, the obligation of the bank to meet the demand was not dependent upon the existence of circumstances which gave the Authority a right to have recourse to the guarantees. In his Honour's view (451):

"To hold that the bank guarantees are conditional upon the making of a demand that conforms to the requirements of the contract between the Authority and the contractor would of course be quite inconsistent with the express statement in the bank guarantees that the undertaking of the Bank is unconditional. To hold that the Bank should not pay on receiving a demand, but should be bound to enquire into the rights of the Authority and the contractor under a contract to which the Bank was not a party would be to depart from the ordinary meaning of the undertaking that the Bank is to pay on demand. It would be contrary to the settled rules governing the implication of terms in contracts to imply provisions that would contradict the ordinary meaning of the words of the bank guarantees in this way."

50 Stephen J emphasised the "commercial currency" of the guarantees being the equivalent of a cash payment, and "being instantly and unconditionally convertible to cash" (457). As to the argument that in making the demands the Authority was in breach of the contract and, therefore, was not entitled to call upon the guarantees, Stephen J held that the contention "must fail because of the terms of the guarantees themselves". Again, his Honour emphasised that the guarantees "stood in place of cash securities", and that since their terms provided for an unqualified right to demand payment at any time, those terms "must be taken to have represented the intention of the parties" (458).

"Had the construction contract itself contained some qualification upon the Authority's power to make a demand under a performance guarantee, the position might well have been different. In fact the contract is silent on the matter."

52 Gibbs J declined to determine whether a breach of contract would alter the result (452):

"It is unnecessary to consider whether it would be possible to grant to the contractor any relief against the Bank if it were established that the making of a demand by the Authority was a breach of its duty to the contactor, because, for the reasons which I am about to state, I consider that the Authority was entitled, as between itself and the contractor, to make the demands when it did."

53 The plaintiff is correct in identifying that, unlike the contract between the plaintiff and the first defendant, the contract in Wood Hall was silent as to any qualification to the right to have recourse to the guarantee. However, the emphasis given to the unconditional nature of the guarantees, and their "commercial currency", remains relevant to the question of construction.

54 In Reed Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd (1999) 15 BCL 158, Austin J was concerned with a maintenance bond provided by the contractor "for the purpose of ensuring the due and proper performance of the contractor's obligations" under a construction contract. Austin J observed that the bond "constitutes an unconditional promise by FAI to pay to the defendant on demand any sums which may from time to time be demanded", but although the bond was expressed as security to ensure due and proper performance of the builder's obligations, the bond did not, "as a matter of construction import the terms of that contract into the bond" (161).

55 A clause of the contract stated that any security provided by the contractor "shall be available to the proprietor whenever the proprietor shall be entitled to payment of monies by the builder ... or whenever the proprietor shall be entitled to reimbursement of any monies paid to others under this Agreement".

56 Austin J referred to Wood Hall and other authorities and made the following remarks which were subsequently approved by the Full Court of the Federal Court in Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd (above) (164):

"While, therefore, the court will not enjoin the issuer of the bond from performing its unconditional obligation to make payment, there are some exceptions to the proposition that the performance of the bond is an event in which the court will not intervene at all.

There are three principal exceptions. The first, noted in passing by Gibb J in Wood Hall case (at 451) and recognised as well by Young J in Hortico (Aust) Pty Ltd v Energy Equipment Co (Aust) Pty Ltd (1986) 2 BCL 366, 370, is that the court will enjoin the party in whose favour the bond has been given for acting fraudulently. The second exception, recently recognised by the Victorian Supreme Court in Olex Focas Pty Ltd v Skodaexport Co Ltd [1997] (ATER Digest) [46-163], is that the court will intervene to restrain the party for whose benefit the bond was given from acting unconscionably for the purposes of s 51AA of the Trade Practices Act 1974 (Cth).

There is a third exception, which is based on contract and is the most important for present purposes. A line of cases has recognised that whilst the court will not restrain the issuer of the bond from acting on the unqualified promise to honour it, if the party in whose favour the bond has been given has made a contract promising not to call upon the bond, breach of that contractual promise may be enjoined on normal principles relating to the enforcement by injunction of negative stipulations in contracts.

In the building context the key issue will be whether a negative stipulation is expressed or implied in the building contract."

57 Austin J identified the question for consideration as to whether there was an express or implied negative stipulation in the building contract that the proprietor had promised not to call upon the bond in the circumstances under consideration. His Honour found that there was an implied prohibition which amounted to "a contractual stipulation between the plaintiff and the defendant which limits what would otherwise be the defendant's absolute entitlement to insist on payment under the security". His Honour then analysed the clause to which I earlier referred and, in particular, found that the words "shall be entitled" require "substantially more than having a bare claim to be entitled to reimbursement".

58 The plaintiff denies any reliance on a negative stipulation in the contract. As mentioned, the case for the plaintiff is based upon the proposition that the correct approach is to identify, from the terms of the contract, the right of the second defendant to call on the Defects Bond, and the circumstances in which the second defendant is entitled to exercise that right.

59 In Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd, the Full Court of the Federal Court was concerned with performance bank guarantees and the relevant principles of construction. After referring to the decision of the High Court in Wood Hall, the joint judgment identified "three principal exceptions" to the rule that a court will not restrain the issuer of the guarantee from performing its obligations under the guarantee:

"77 Nevertheless, the authorities have recognised three principal exceptions to the rule that a court will not enjoin the issuer of a performance guarantee, or bond, from performing its unconditional obligation to make payment. The exceptions were succinctly stated, with references to relevant authorities, by Austin J in Reed Construction Services Pty Ltd v Kheng Seng (Aust) Pty Ltd (1999) 15 BCL 158 at 164-165:

First - the Court will enjoin the party in whose favour the performance guarantee has been given from acting fraudulently: see eg Wood Hall Ltd 141 CLR per Gibbs J (at 451). As the primary judge observed at [36] Clough does not assert that ONGC has made a fraudulent claim. Accordingly, the first exception has no application in the present case.

Second - the party in whose favour the performance bank guarantee has been given may be enjoined from acting unconscionably in contravention of s 51AA of the TPA_: Olex Focas Pty Ltd v Skodaexport Co Ltd_ [1998] 3 VR 380. On this point, different views have been expressed about the reach of s 51AA. The High Court has not determined which of these views is correct: Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd [2003] HCA 18; (2003) 214 CLR 51 at [44]- [45]. In any event, none of the categories of unconscionable conduct recognised in Australian Competition and Consumer Commission v Samton Holdings Pty Ltd (2002) 117 FCR 301 at [48] apply in this case. Accordingly, the second exception has no application.

Third - the most important exception for present purposes, is that, whilst the Court will not restrain the issuer of a performance guarantee from acting on an unqualified promise to pay:

'... if the party in whose favour the bond has been given has made a contract promising not to call upon the bond, breach of that contractual promise may be enjoined on normal principles relating to the enforcement by injunction of negative stipulations in contracts.

Reed Construction Services 15 BCL at 164 (Austin J)'

It may be preferable not to describe this as an exception but rather as an over-riding rule because it emphasises that the 'primary focus' will always be the proper construction of the contract: Bateman Project Engineering Pty Ltd v Resolute Ltd [2000] WASC 284; (2000) 23 WAR 493 per Owen J at [30]. Stephen J recognised this in Wood Hall Ltd 141 CLR at 459 by observing that the provisions of the contract may qualify the right to call on the undertaking contained in a performance guarantee.

78 Numerous authorities have accepted the third proposition. Many were referred to in Reed at 165. Others include Fletcher Construction [1998] 3 VR at 826-7_; Bachmann Pty Ltd v BHP Power New Zealand Ltd_ [1998] VSCA 40; [1999] 1 VR 420 at [28]; Baulderstone Hornibrook Pty Ltd v Qantas Airways Ltd [2000] FCA 672 at [10], Rejan Constructions Pty Ltd v Manningham Medical Centre Pty Ltd [2002] VSC 579 at [37].

79 In Fletcher Construction [1998] 3 VR 812, Charles JA at 821 and Callaway JA at 826 recognised that there are generally two commercial reasons why a beneficiary of a performance guarantee may have stipulated for such an entitlement. One is to provide security for a valid claim against the contractor. The second, which is additional to the first, is to allocate the risk between the parties as to who shall be out of pocket pending the resolution of a dispute between them. Callaway JA went on to observe that it is a question of construction of the underlying contract whether the guarantee is provided solely by way of security or also as a risk allocation device. He went on to say (at 827):

'Remembering that we are speaking of guarantees in the sense of standby letters of credit, performance bonds, guarantees in lieu of retention moneys and the like, the latter purpose is often present and commercial practice plays a large part in construing the contract. No implication may be made that is inconsistent with an agreed allocation of risk as to who shall be out of pocket pending resolution of a dispute and clauses in the contract that do not expressly inhibit the beneficiary from calling upon the security should not be too readily construed to have that effect. As I have already indicated, they may simply refer to the kind of default which, if it is alleged in good faith, enables the beneficiary to have recourse to the security or its proceeds.'

80 It seems to us that his Honour's reference to a default 'alleged in good faith' was intended to embrace the first exception we have set out above. That is to say, the breach relied upon to support a call on the performance guarantee must not be asserted fraudulently because the Court will enjoin a party from so acting. Thus, subject to the exceptions of fraud and unconscionability, the beneficiary of a performance guarantee granted in its favour as a risk allocation device, will be entitled to call upon the guarantee even if it turns out, ultimately, that the other party was not in default: Fletcher Construction [1998] 3 VR at 827.

81 In determining whether the underlying contract confers an unfettered right to call upon the performance guarantee, the importance of such instruments in the construction industry, both nationally and internationally, is a factor which bears upon the question of construction of the Contract. A number of authorities support this proposition:

(1) In Wood Hall Ltd 141 CLR at 457-458, Stephen J referred to English authority which described the performance guarantee as standing on a similar footing to a letter of credit.

(2) In the passage from the judgment of Callaway JA in Fletcher Construction [1998] 3 VR at 827 quoted above, his Honour emphasised the importance of commercial practice in construing the contract. The reference in the judgment of Charles JA at 822 to the passage from Hudson's Building and Engineering Contracts, is to similar effect.

(3) In Bachmann [1998] VSCA 40; [1999] 1 VR 420, Brooking JA referred at [51] to the practice in the United States. He said that the generally accepted view in that country is that standby letters of credit (and hence, performance guarantees) are intended by the parties to the underlying contract to require the supplier or contractor to:

... stand out of the amount of the credit in favour of the buyer pending resolution of the underlying dispute.

(4) This approach is supported by the observations of Hobhouse LJ in Toomey v Eagle Star Insurance Co Ltd [1994] 1 Lloyd's Law Rep 516 at 520, that parties to a commercial contract are to be taken to have contracted against a background which includes the earlier authorities on the construction of similar contracts.

82 Notwithstanding the importance of commercial practice, the statements in these authorities do not suggest that the Court should depart from the task of construing the terms of the contract in each case. What the authorities emphasise is that the commercial background informs the construction of the contract. In particular, as Callaway JA said in the passage quoted above, the Court ought not too readily favour a construction which is inconsistent with an agreed allocation of risk as to who is to be out of pocket pending resolution of the dispute about breach.

83 It follows that clear words will be required to support a construction which inhibits a beneficiary from calling on a performance guarantee where a breach is alleged in good faith, ie, non-fraudulently. This view is also supported by the remarks of Charles JA in Fletcher Construction [1998] 3 VR at 820-821. There, his Honour analysed and placed some doubt upon the correctness of decisions such as Pearson Bridge (NSW) Pty Ltd v State Rail Authority of New South Wales (1982) 1 Australian Construction Law Reports 81 at 86.

84 In Pearson Bridge 1 Australian Construction Law Reports at 86, and in other authorities which have followed it, Yeldham J held that the words '(i)f the Principal becomes entitled to exercise all or any of the rights under the Contract ...' contained an implied negative stipulation which qualified the Principal's entitlement to call upon the guarantee. In Fletcher Construction [1998] 3 VR, Charles JA at 820-821 appeared to prefer the views of Cole J in Hughes Bros Pty Ltd v Telede Pty Ltd (1989) 7 BCL 210, where his Honour concluded that a similar clause contained no such qualification.

85 The question of construction as to whether the underlying contract contains a qualification on the right to call upon the security must be determined in light of the contract and the form of the performance guarantee as contained in the contract. This accords with the basic principle of construction that the terms of an instrument must be read as a whole: Re Media, Entertainment and Arts Alliance; Ex parte The Hoyts Corporation Pty Ltd [1993] HCA 40; (1993) 178 CLR 379 at 386-387. It also accords with the approach taken to the construction of the underlying contract in the leading authorities to which we have referred: see eg Wood Hall Ltd 141 CLR at 445, 451, 457-458; Fletcher Construction [1998] 3 VR at 821-822_._"

60 The judgment in Clough Engineering supports the approach taken by the trial judge, as does the judgment of the Western Australian Court of Appeal in JKC Australia LNG Pty Ltd v CH2M Hill Companies Ltd (No 2) [2020] WASCA 112. The court was concerned with a construction contract and parent company guarantees provided in respect of the performance of a sub-contractor's obligations. The joint judgment of Buss P and Vaughan JA emphasised that previous decisions are of assistance in identifying features which are often considered to be of significance in construing contracts and performance guarantees, but there is no separate rule of construction for such contracts and "the usual process of constructions applies" [74].

61 Having observed that many cases are concerned with the proper construction of a contract, rather than the guarantee itself, their Honours said [77]:

"In that connection it is established that, in construing the contract, the unconditional nature of a performance bond, and its terms, can be taken into account where the contract attaches and approves the form of the bond. However, the terms of the performance bond do not control the question of construction". [Citation omitted.]

62 The trial judge cited a passage from the joint judgment in JKC Australia which he identified as summarising the proper approach to determining whether a performance guarantee operates for the purpose of risk allocation [82]:

"2 The court should not too readily favour a construction which is inconsistent with an agreed allocation of risk as to who is to be out of pocket pending resolution of a dispute. However, whether an instrument has a purpose of allocating risk pending determination of a dispute cannot be assumed. It is to be identified as a matter of contractual construction. The description 'risk allocation device' expresses a process of conclusion after the process of construction has been worked through.

3 The fact that a guarantee is required to be unconditional is one factor which may lead to the conclusion that the intention of the parties was to allocate risk. Thus the typical language of a performance bond (where appended to the underlying contract so as to constitute an approved form for the purposes of the contract) may provide a reason to conclude that the contract between principal and contractor is to have the consequence that the bond is to operate as a risk allocation device. [Footnotes omitted.]"

63 From the authorities, in my view the trial judge correctly summarised the position with respect to constraining access to a performance guarantee which fulfils the function of risk allocation [15(d)]:

"(d) In a case where on the proper construction of the contract, the performance guarantee fulfils the function of risk allocation, and is facilitated by an undertaking on the part of the third party which is unconditional and irrevocable, the court will not prevent access to the security by the benefiting party, except:

(ii) in order to prevent unconscionable conduct on the part of the benefiting party, or

(iii) where to do so would contravene a negative stipulation contained in the contract. It is accepted that the negative stipulation can be express or implied.

(e) The cases have generally accepted that a precondition of recourse to the security is that there must be a bona fide dispute on foot. This seems to be simply another way of saying that the party benefiting from the guarantee must not act fraudulently or unconscionably."

64 The trial judge referred to the general acceptance that a precondition of recourse is the existence of a bona fide "dispute". Clause 6.4(a)(i) provides that the first defendant may draw down the Performance Bond if the first defendant has a bona fide "Claim" against the plaintiff. Included in the definition of "Claim" is "any allegation ... or demand of any nature however arising and whether present or future, fixed or unascertained, actual or contingent, and whether at law, in equity, under statute or otherwise". To the extent that a "Claim" might not involve a dispute, in my view the contract under consideration extends the right of the first defendant to have recourse to the Performance Bond beyond the existence of a bona fide dispute. Further, in my view the Defects Bond was intended to have a risk allocation function, and was intended to be available to the first defendant in the event that the first defendant possesses a "bona fide Claim" against the plaintiff.

65 The trial judge correctly identified that the issue of a right to call upon the bank guarantee "is ultimately a matter of construction of the contract" which will be "informed by and require consideration of the commercial purpose of the guarantee" [15]. His Honour correctly noted that the contract must be read as a whole and that, as in the case under consideration, where the guarantee is set out in the contract it must be taken into account in the construction of the contract. There is nothing in the remarks of the trial judge to support a suggestion that his Honour did anything other than construe the contract as a whole, or that he placed undue emphasis on any particular aspect. In particular, his Honour did not allow the terms of the guarantee to control the question of construction.

66 The starting point is assessment of the terms of the contract in their entirety, considered in the context of the terms of the guarantees which comprise the Performance and Defects Bonds, and the commercial purpose of those guarantees. Having regard to clause 6, plainly the Performance Bond is intended to perform a risk allocation function by allocating the risk between the parties as to who should be out of pocket pending resolution of disputes. The plaintiff did not suggest otherwise.

67 As to the Defects Bond, the unconditional nature of the bank guarantee which comprises the Defects Bond supports the view that the Defects Bond is also intended to allocate risk. The "commercial currency" of the guarantee is significant in this regard. Further, there is nothing in the terms of the contract which would support an implication that the Defects Bond was not intended to allocate risk.

68 Although clause 6 does not, in specific terms, apply the provisions in clauses 6.4 and 6.5 to the operation of the Defects Bond, no reason is apparent from the terms of the contract, or the commercial purposes of the contract and the guarantees, why the parties would have intended to treat access to the Defects Bond in any manner different from access to the Performance Bond. The contract as a whole, and in particular the exchange process in clause 6, suggests otherwise.

69 During the construction phase, the first defendant holds a bank guarantee and an insurance bond which, together, comprise the Performance Bond. Those documents are in unconditional terms, and the first defendant is entitled to access the guaranteed funds at any time if the first defendant possesses a "bona fide Claim".

70 At the point of Practical Completion of the construction works, and a handover of possession, the contract enters the Defects Liability period. The insurance portion of the Performance Bond is returned by the second defendant to the plaintiff, and the 5% bank guarantee portion is "exchanged" for the Defects Bond which consists of a bank guarantee of 2.5%. The name of the bond changes from Performance Bond to Defects Bond because it now applies during the Defects Liability period.

71 Upon Practical Completion, in substance two guarantees are exchanged for one guarantee of a lesser amount.[5] The single guarantee simply takes the place of two guarantees. In my view, the parties intended that the conditions applicable with respect to the two guarantees by reason of clause 6 should continue to apply to the single guarantee. Hence the simple "exchange" of guarantees in identical terms.

72 In these circumstances, it is not appropriate as contended by the plaintiff, to approach the issue by first asking where the right of recourse to the Defects Bond is identified in the contract, and then ask whether the first defendant has complied with any condition precedent to the right to recourse. The unconditional right of access is found in the terms of the guarantees, and the correct approach is to identify any term in the contract (negative stipulation) which qualifies the right of recourse in particular circumstances.

73 The right of the first defendant to draw down on any Performance Bond is, indirectly, subject to the first defendant having acted in accordance with clause 6.4. The indirect nature of the constraint is identified in clause 6.5 which provides that the restraint on the plaintiff from taking steps to injunct or restrain a draw down or payment of proceeds is "subject to" the first defendant "having acted in accordance with clause 6.4". For the reasons discussed, in my view those provisions also apply to a draw down on the Defects Bond made on the basis of possessing a bona fide Claim or the existence of other events identified in clause 6.4(a)(ii)-(iv).

74 It follows from these reasons that I reject the position advanced by the plaintiff that clause 76 identifies both the only right of the first defendant to draw down on the Defects Bond, and the circumstances in which recourse may be had to that Bond. Further, clause 76 is not a negative stipulation which qualifies the right of recourse to the Defects Bond in all circumstances. It should not be overlooked that clause 76 is expressly subject to clause 6, and the right of the first defendant to proceed with the remedy specified in clause 76 is expressed as "in addition to any other Rights under this Deed, any other Project Document or at Law."

75 The operation of the Defects Bond outside the parameters of clause 76 is clear from the application of the Defects Bond to the scheme of defects rectifications found in clause 68. During the Defects Liability Period, clause 68 provides that the first defendant is required to give notice in writing to the plaintiff specifying any defects in, or omissions from, the construction works. Further, clause 68 directs that the plaintiff must rectify any defects or omissions notified in the Certificate of Stage Practical Completion.

76 A direct link between the operation of the Defects Bond and clause 68 is found in clause 6.6 which provides that, subject to an extension of the Defects Liability Period, the first defendant is to return the Defects Bond to the plaintiff within 5 business days of the issue of a certificate under clause 68.4. As earlier discussed, clause 68.4 provides for the provision of a certificate after the expiration of the Defects Liability Period stating that, in the opinion of the Certifier, all known defects in, or omissions from, the works under the development agreement which relates to the Defects Liability Period have been rectified. In addition, clause 6.6(d) provides that if the Defects Liability Period is extended by more than 12 months in relation to any works to make good an omission or defect, at the expiry of the original Defects Liability Period the contractor may replace the Defects Bond with a bank guarantee for the value of the cost of rectifying those works that are subject to the extended Defects Liability Period.

77 It is clear that the Defects Bond is intended to apply in respect of the obligation of the plaintiff, during the Defects Liability Period (or an extension of that period), to make good defects in, or omissions from, the works in respect of which it receives notice from the first defendant under clause 68. I agree with the trial judge that clauses 75 and 76 are not primarily concerned with defects and omissions which are covered by clause 68. Although the broad expression in par (a) of the definition of Default Event, "a failure by the Contractor to comply with any provision of this Deed or any other Project Document", is capable of applying to defects of the type contemplated by clause 68, in my view subpar (a) is a catchall provision which is not intended to apply to defects and omissions of the type contemplated by clause 68. If the plaintiff is correct, in respect of any defect, before the first defendant will be entitled to have recourse to the Defects Bond, it would be required to comply with the procedures set out in both clauses 68 and 76. Two types of notice would be required.

78 In addition, if it was intended that clause 76 applied to the defects process, two different rectification times would be involved. Under clause 68 the obligation is to make good the defect within 7 days. This stands in contrast to the 15 day period allowed by clause 76.

79 A consideration of these provisions in their entirety strongly supports the view that clauses 75 and 76 were not intended to be the sole source of the first defendant's right to have recourse to the Defects Bond. In my opinion, the trial judge was correct in finding that the Defects Bond was intended to fulfil a risk allocation function, and it was intended that the first defendant would be able to have recourse to the Defects Bond if it possesses a "bona fide Claim".

80 Grounds 1 and 2 of the plaintiff's appeal are not made out.

81 While other disputes were on foot, on 29 June 2020, at the request of the first defendant, the second defendant certified that liquidated damages in the sum of $3,330,000 were payable by the plaintiff as a consequence of delay in achieving Stage Practical Completion. The history and relevant questions were conveniently summarised by the trial judge [38]-[44]:

"[38] The first defendant's right to payment of liquidated damages arises pursuant to cl 76.8 of the contract. Clause 76.8(a)(i) provides that liquidated damages will be payable where the contractor 'does not achieve Stage Practical Completion by the Date for Stage Practical Completion'. The amount of liquidated damages is prescribed by Schedule 1 at $15000 per day.

[39] As already noted, it is common ground that stage practical completion was achieved on 20 September 2017. The definition of 'Date for Stage Practical Completion' is 'the date by which the event of Stage Practical Completion must be achieved by the Contractor, as identified in Schedule 1 and as may be extended from time to time in accordance with clause 66.2.' Predictably, cl 66.2 exhaustively lists the circumstances in which the contractor will be entitled to an extension of the date for stage practical completion. Schedule 1 provides that the date for stage practical completion was to be 6 October 2016. It seems to be conceded by the first defendant that that date had been extended in accordance with the contract to 10 February 2017. Accordingly, the first defendant's claim for liquidated damages is based on an asserted delay between 10 February 2017 and 20 September 2017, 222 days. When this is calculated in accordance with cl 76.8, the relevant calculation is $15,000 x 222 days = $3,330,000.

[40] The first defendant's assertion of delay and consequent entitlement to liquidated damages is disputed by the plaintiff. The plaintiff's reasons for dispute are set out in detail at para 5.3 of the statement of claim. However, the merits of this dispute are not relevant to the question before me.

[41] The second defendant's role in respect of liquidated damages is prescribed by cl 76.8(g), which is in the following terms:

(i) certified by the Sub-Independent Certifier under clause 42B; and

(ii) payable by the Contractor notwithstanding any dispute in relation to such certification.'

[42] On 23 June 2020, the first defendant forwarded a letter to the second defendant requesting that the second defendant, as the sub-independent certifier, 'the sum of $3,330,000 liquidated damages' calculated in the manner which I have discussed above. The letter concluded with this sentence:

'The principal requests the sub-independent certifier provide a certificate forthwith as required by clause 76.8(g).'

[43] On 29 June 2020, the second defendant forwarded a letter to both the plaintiff and the first defendant enclosing what it described as 'our determination of liquidated damages under clause 76.8 of the construction contract, as requested by principal's project manager on 23/6/2020'. It enclosed with that letter a document entitled 'Certificate for Payment (excluding GST)'. The certificate was numbered WTP46, showed an assessment date of 26 June 2020, and then set out a calculation which amounted to an adjustment to the contract sum for work completed to the assessment date, in the amount of the assessed liquidated damages. The certificate attached a schedule of previously certified claims by the contractor for payment for work performed under the contract. The last entry in that schedule was for the liquidated damages and this is shown as a negative sum. Hence, the certified payment was shown in the negative, presumably on the basis that it was a sum to be paid by the contractor to the principal.

[44] Questions 2 and 3 raise the proper construction and operation of cl 76.8(g). Counsel for the plaintiff submits that the words 'under clause 42B' in subpar (i) mean that the second defendant may only certify liquidated damages under that provision if a payment claim has first been made by the plaintiff under cl 42B, and then only as part of the process under that provision initiated by that payment claim. It is submitted that the second defendant has no other power under the contract to certify liquidated damages. It is further submitted that the certification by the second defendant in this case arose not as part of a process initiated by a payment claim under cl 42B, but rather by way of a request from the first defendant directly to the second defendant. It is argued that in those circumstances, the second defendant has acted beyond its power and authority under the contract, and the resultant certification is null and void, and of no effect whatsoever."

82 Clause 76.8 of the contract is concerned with liquidated damages for delay. Sub-par (g) is as follows:

(i) certified by the Sub-Independent Certifier under clause 42B; and

(ii) payable by the Contractor notwithstanding any dispute in relation to such certification."

83 Clause 42B says nothing about liquidated damages. It is headed "Payments", and creates a scheme for the issuing of payment claims by the plaintiff during construction, and certification of those claims by the second defendant:

As consideration for carrying out the Project Works, the Principal must pay to the Contractor the Project Works Contract Sum for Project Works completed in accordance with this Deed in accordance with this clause 42B.

On the 28th of each month following the commencement of the Project Works (or next Business Day), the Contractor must, as a condition precedent to payment under clause 428.1:

(a) issue payment claims for the Project Works performed during that month to the Sub-Independent Certifier, including any Approved Costs, in a form as reasonably required by the Principal; and

(b) at the same time, issue a copy of its payment claim to the Principal."

84 Clause 42B.3 provides for the certification within 10 days of receipt of a payment claim, and clause 42B.3(c) requires the first defendant to pay the plaintiff the amount certified within 10 business days of receipt of certification. Conditions precedent to payment of claims and, passing of title to project works, are dealt with in clauses 42B.4 and 42B.5. Clauses 42B.6-42B.8 deal with claims for final payment and issues under the Security of Payment Act.

85 Clause 42B.9 is concerned with payment claims for unfixed items and certification by Sub-Independent Certifier concerning storage, labelling and protection of the second defendant's property, and payments by the second defendant. Clause 42B.10 provides that certification under clause 42B.9 is final and binding, subject to any rights under clause 23.

86 Clause 42B.11 concerns payment for Provisional Sum Work.

87 As the trial judge correctly observed, clause 42B provides for "ongoing monthly progress payments during the performance of the works, and a final payment at the end of the Defects Liability Period" [45]. Clause 42B is not concerned with, and cannot sensibly within the contract as a whole, be applied to liquidated damages or the processes related to rectification of defects in, or omissions from, the Project Works.

88 As to the proposition advanced by the plaintiff that the authority of the second defendant to certify liquidated damages required a payment claim as a pre-condition to such certification, I agree with the trial judge who found there was a "clear difficulty" with the plaintiff's reasoning [47]-[50]:

"[47] Clause 42B.2 provides that the issue of a payment claim is a condition precedent to payment under cl 42B.1, which requires payment by the principal of the project works contract sum for project works completed in accordance with the contract. The term 'project works contract sum' means the fixed lump sum price set out in Schedule 21, as adjusted in accordance with the deed. Specific examples of provision for the adjustment of the project works contract sum appear in respect of provisional sums under cl 42B.11. It is not difficult to see that it would also include adjustments arising from variations to the project works under cl 42 and delay costs payable to the contractor under cl 66.3. The commercial purpose of basing progress payments on a payment claim is obvious. However, cl 42B.2 says nothing about the question of liquidated damages. In particular, there is no express provision that a payment claim be a precondition of such an assessment or certification. This may well be because in contrast with the assessment of claims for payment for work done, there is no commercial purpose in making a payment claim a condition precedent to the assessment of liquidated damages. On the contrary, as in this case, it is easy to envisage that liquidated damages could far exceed a monthly payment claim by the contractor. If the plaintiff's interpretation is correct, then the plaintiff could simply defer liability for payment by not making a payment claim. This seems to me to be contrary to an interpretation which makes commercial sense, and is unlikely to reflect the intention of the parties. I think it far more consistent with the parties' intention as expressed throughout the whole deed, that it was intended that the sub-independent certifier would certify for liquidated damages upon the request of either party, more likely the principal, and that such certification would trigger payment, but only on account and not as a final determination of the plaintiff's liability to pay liquidated damages. The provisional nature of the assessment of progress claims, and the incorporation of the assessment of liquidated damages into that provisional process, suggest that a purpose of cl 42B is again to allocate risk between the parties by ensuring that as far as possible the parties are not out of pocket as the work proceeds, despite the possibility of adjustment upon final adjudication. It follows that payments which are assessed as due by one party to the other should actually be paid, but only on the provisional basis already discussed. There is no commercial reason therefore why liquidated damages, once certified by the sub-independent certifier, should not actually be paid by the contractor. It is a commercial nonsense to suggest that this should only take place in response to a process initiated by the party liable to make that payment.

[48] Accordingly, I do not agree with Mr Rollnik that the words in cl 76.8(g) 'under clause 42B' create a condition precedent or something analogous to a jurisdictional barrier to certification by the sub-independent certifier of liquidated damages. In my view, the clear purpose of those words is to bring the certification and payment of liquidated damages into the same provisional process relevant to the assessment of progress payments under cl 42B. The certification is not intended to finally determine the principal's entitlement to liquidated damages, but in the same way as a certification authorises payment or non-payment of a payment claim, so certification under cl 76.8(g) of liquidated damages will authorise a payment in favour of the principal. The critical effect of those words is that the certification by the sub-independent certifier in respect of liquidated damages has the same status as a certification in respect of a payment in favour of the contractor, that is, it 'will be on account only' pursuant to cl 42B.7. Although the balance of that provision reserves the rights of the principal to contest payments without referring to the contractor, it seems to me that, applying the principles applicable to construction contracts, that provision should also apply in the same way to reserve the contractor's rights with respect to the certification of liquidated damages.

[49] This construction is consistent with the terms of cl 76.8(g), read as a whole. Subparagraph (ii) makes it clear that the contract envisages that liquidated damages will be actually paid by the contractor upon certification by the sub-independent certifier, albeit on a provisional basis and without a final determination of any dispute relating to it. That provision clearly proceeds on the assumption that the certification will not simply be a negative adjustment against a payment claim for the same or greater amount, but that such damages will actually be payable by the contractor. Further, it confirms that the provisions of cl 42B.7 are applicable, because it assumes that such damages will be paid prior to the resolution of any dispute.

[50] It follows, therefore, that the issue of a payment claim by the contractor is not a necessary precondition of certification under cl 42B and the consequent payment of liquidated damages by the contractor. Accordingly, my conclusion with respect to issue 2 is that the second defendant did certify the payment of liquidated damages in accordance with the contract."

89 The plaintiff submitted that a reasonable business person would understand the words "under clause 42B" to mean that "the certification of liquidated damages must follow the payment claim process." This construction applies because "the ordinary and natural meaning of the words, 'under clause 42B' requires that, as far as possible, all clauses that comprise Part 42B (ie clauses 42B.1 - 42B.11) are to apply to the certification of liquidated damages, and there is no warrant to artificially constrain the meaning of the words 'under clause 42B'." The plaintiff contended that the trial judge took an impermissible and narrower approach which departs from the clear and unambiguous words "under clause 42B", and the approach of his Honour meant that in clause 76.8(g), the words "under clause 42B" have no work to do.

90 As I have said, clause 42B says nothing about liquidated damages or defects. It is concerned with the plaintiff issuing payment claims, and payment by the first defendant of progress payments. It expressly provides that the "contractor" (the plaintiff) must issue payment claims. The plaintiff's interpretation involves either a re-writing of clause 42B, or completely ignoring the natural meaning of the plain words in clause 42B.

91 In clause 76.8(g)(i), the phrase "under clause 42B" applies to the certification of liquidated damages by the certifier. Clauses 42B.3, 42B.9 and 42B.10 apply to certification, but not in respect of liquidated damages or remedying defects. Clause 42B.3 provides for certification within 10 days of receipt of a "payment claim" made by the plaintiff in respect of project works performed, such payment claim being required as a condition precedent to payment for such works. Such claims and payment operate independently of the obligation to pay liquidated damages or remedy defects. It would distort the words of the contract to infer that the parties intended some form of payment claim for liquidated damages must be made by the first defendant. I agree with the trial judge that the reference to certification "under clause 42B" is intended to bring the certification of liquidated damages into the "same provisional process relevant to the assessment of progress payments under clause 42B" [48].

93 Ground 4 of the plaintiff's appeal contains an assertion rather than a basis for appeal. Its states that, having wrongly construed clause 76.8(g), the trial judge did not decide the third question as it "fell away" following his Honour's determination. This is an issue that is encompassed by the appeal of the second defendant.

94 As discussed earlier in these reasons, as part of its response to the proceedings taken by the plaintiff, the first defendant filed a counterclaim for $3.3 million, payable as liquidated damages "pursuant to clause 76.8(g)(ii) of the Contract". Before the trial judge, the first defendant submitted that following his Honour's determination that the second defendant certified the payment of liquidated damages in accordance with the contract, his Honour should have entered judgment for the first defendant on the counterclaim.

95 The trial judge did not accept the submissions of the first defendant and ordered that the proceedings on the counterclaim be adjourned for a future directions hearing before his Honour. The first defendant's grounds of appeal against that order are set out in par [11] of these reasons. In essence, those grounds complain that his Honour erred in finding that the questions raised on the defence to the counterclaim had not been fully resolved by his judgment on the preliminary issues because that judgment "finally and fully" disposed of all the issues involved in the counterclaim. Further, the first defendant asserts that the defence to the counterclaim does not raise an arguable defence.

96 In its defence to the counterclaim, the plaintiff pleaded that the first defendant is estopped from relying upon the date of Stage Practical Completion used by the second defendant to calculate the amount of liquidated damages. In addition, or in the alternative, the plaintiff pleaded that the first defendant had impliedly waived any right to insist on that particular date, and had waived any entitlement to be paid liquidated damages calculated from that date. Finally, the plaintiff pleaded that, by reason of its conduct, the first defendant is prevented from insisting that it is entitled to liquidated damages calculated from the date used by the second defendant in making the certification of liquidated damages.

97 As discussed earlier, the trial judge decided to conduct an early hearing with respect to specific issues. His Honour described those arrangements as follows [13]:

"... The practical circumstances involved the Court offering, and the parties accepting, an early hearing in respect of certain defined issues which are central to the overall dispute between the parties. Those issues are the subject of an order by me pursuant to r 559 of the Supreme Court Rules 2000, that they be heard and determined before each other issue in the action. The specific issues are:

(a) The first defendant's right to call upon the defects bond.

(b) Whether the second defendant certified the payment of liquidated damages in accordance with the contract.

(c) Whether cl 76.8(g)(ii) of the contract requires the plaintiff to pay the sum certified by the second defendant, notwithstanding any dispute in relation to such certification, including any dispute within the plaintiff's Type 1 notice of dispute dated 6 July 2020, or in the plaintiff's reply and defence to the counterclaim."

98 Having found that in the event of a bona fide dispute that the first defendant was entitled to have recourse to the Defects Bond without notice to the plaintiff [36], and that the second defendant certified the payment of liquidated damages in accordance with the contract [50], with respect to the third issue his Honour said [51]:

"[51] Having regard to the argument advanced on behalf of the plaintiff with respect to issue 3, the resolution of that issue must follow that of issue 2. The plaintiff's argument acknowledges that liquidated damages are payable notwithstanding that there is a dispute concerning facts and matters which might affect the liability of the plaintiff to pay liquidated damages. However, counsel argued that by way of an analogy with jurisdiction, a dispute within the meaning of cl 76.8(g)(ii) did not arise in circumstances where the sub-independent certifier had purported to certify as to liquidated damages, but was not authorised by the contract to do so. In my view, there is considerable force in that argument. If the sub-independent certifier has acted completely outside its authorisation, then the provisions of cl 76.8(g)(ii) would simply not be applicable. However, given my conclusion with respect to the second issue, that consideration does not arise. The fact of the matter is that, in my view, the sub-independent certifier was entitled to certify as it did. It is acknowledged that there is a Type 1 dispute in force concerning the plaintiff's liability for liquidated damages, but it is not suggested by either party that the provisions of cl 76.8(g)(ii) do not apply to such a dispute. It follows that the resolution of this issue is that cl 76.8(g)(ii) of the contract does require the plaintiff to pay the sum certified by the second defendant, notwithstanding the existence of a Type 1 dispute in that regard."

99 To the observations in [51] of his Honour's reasons should be added earlier remarks which followed his Honour's discussion concerning the plaintiff's attempt to apply clause 42B to a determination under clause 76.8(g):

"This construction is consistent with the terms of cl 76.8(g), read as a whole. Subparagraph (ii) makes it clear that the contract envisages that liquidated damages will be actually paid by the contractor upon certification by the sub-independent certifier, albeit on a provisional basis and without a final determination of any dispute relating to it."

100 Bearing in mind the first defendant's submission that, in substance, his Honour finally determined the issues arising under the counterclaim, it is necessary to bear in mind the distinction between the third issue identified as the subject of the early hearing, and the answer given by the trial judge. The third issue identified in his Honour's reasons was whether clause 76.8(g)(ii) requires the plaintiff to pay the sum certified as liquidated damages "notwithstanding any dispute in relation to such certification, including any dispute within the plaintiff's Type 1 notice of dispute dated 6 July 2020, or in the plaintiffs reply and defence to the counterclaim". [My emphasis.] However, the answer given by the trial judge in his reasons did not extend to "any" dispute in relation to the certification. Nor did it deal with a dispute based on the plaintiff's reply and defence to the counterclaim. His Honour said [51]:

"It follows that the resolution of this issue is that clause 76.8(g)(ii) of the contract does require the plaintiff to pay the sum certified by the second defendant, notwithstanding the existence of Type 1 dispute in that regard." [My emphasis.]

101 Judgment was delivered on 3 March 2021. The matter resumed before the trial judge on 13 April 2021 when submissions were presented as to the orders and whether his Honour should grant an injunction pending an appeal. Counsel for the first defendant submitted that his Honour should enter judgment for the first defendant on the counterclaim.

102 Counsel contended the first defendant was entitled to judgment on the basis of clause 76.8(g)(ii) because the estoppel argument raised in the defence to the counterclaim did not "undercut the question of the certificate". In response to a submission that his Honour should not be "self-deprecating" because his Honour had taken the next step and considered the contractual effect of the certificate, and answered that question by determining that the contractual effect was to give "a provisional entitlement to payment pending the resolution of the dispute", the trial judge answered:

103 Counsel for the first defendant responded that the estoppel argument does not meet the claim being made in the counterclaim. Later in submissions, counsel urged the trial judge to read his Honour's reasons at [53] which counsel contended would result in his Honour saying "that there is a difference between a payment on a provisional basis and the final determination of the rights of the parties with respect to liquidated damages entitlements or any other contractual rights that our learned friends may wish to ventilate through the Type 1 dispute".

104 In response, counsel for the plaintiff submitted that the issues raised in the defence to the counterclaim go to the question of whether there is an obligation to make a provisional payment, as provided for in the contract.

105 The trial judge delivered ex tempore reasons. The essence of his Honour's reasoning is found in the following passages:

"Now, on the basis of the answers to the second and third questions, the first defendant is seeking judgment on the counterclaim. I note the answer to the second question determined that the second defendant had correctly - had certified the liquidated damages in accordance with the Act, and there was the question that arose in respect of clause 76.8(g)(i i) in relation to the payment of the liquidated damages, notwithstanding any dispute in relation to that certification.

The question is whether the claim of estoppel raised in the defence to the counterclaim prevents or can affect the payment, irrespective of clause 76.8(g)(ii). It seems to me that it is arguable that if this claim is made out then it may well prevent the first defendant from asserting or relying upon the certification in order to insist on payment pursuant to that provision.

I note the provisions of - or what's - what's asserted in paragraph 18 of the - of the - it's probably correctly termed 'the reply to defence and counterclaim', but I've calling it 'defence to the counterclaim', that asserts an estoppel by convention. The - where the convention, which is asserted is that neither party would insist on strict compliance with the requirements of the contract.

The counterclaim attached to the defence or further added to the defence, without further pleading, relying entirely on the pleadings contained in the defence, claim the relief of the payment of the liquidated damages in the sum of three point three million dollars.

The defence to the counterclaim by asserting a claim of estoppel which - which is wide enough to assert that the first defendant is estopped from relying on the terms of the contract, seem to have - well there's two things that can be said about that. Firstly, it may well not be a dispute as to certification at all, but rather something that transcends the contract . In any event , it seems to me to assert that the claim in respect of the payment of the liquidated damages and the estoppel of the first defendant from asserting such a claim goes well beyond the contemplated ambit of the contract and falls outside the risk allocation mechanism of the contract , which includes, of course, and is what - is what gathers in the requirement of payment on certification under clause 76.8(g).

So I - my conclusion - my view is that this question raised on the defence to the counterclaim has not been fully resolved by my determination. I looked again at the arguments , I don't think it was argued on that basis, I think it was argued on the very narrow basis of contract construction. It's not fully resolved by my determination in any event. The estoppel claim, it seems to me, requires determination before the - the counterclaim can be resolved.

So , having regard to that, I'm not satisfied that the determination of the issues by me thus far makes it appropriate or even authorises the entry of judgment on the counterclaim, and so the counterclaim will need to proceed to further determination.

With respect to the - then going back to the question of the counterclaim, it seems to me that I should simply adjourn these proceedings, which are now limited to the counterclaim, for a directions hearing before me on a date to be fixed, which will be - which will be not before the resolution of the plaintiff's interlocutory application. So, in other words, not leaving it to the appeal but leaving it , at least until the interlocutory application is resolved, because that , I think, will determine what happens with the counterclaim and whether it can go - go forward."

106 The first defendant submitted that contrary to the views of the trial judge, the hearing of the preliminary issues "was argued on the basis that the answers to questions 2 and 3 would resolve the dispute over the [second defendant's] certification of liquidated damages". Further, it was submitted that the plaintiff "did not argue at the trial of the separate questions that a dispute estoppel argument prevented judgment from being entered on the counter-claim".

107 On the hearing of the preliminary issues, the first defendant's written submissions contended that on a plain reading of clause 76.8(g)(ii), the plaintiff is obliged to pay the certified sum "pending the resolution of any dispute whatsoever" concerning certification of liquidated damages. The submission asserted that "any dispute over certification is managed under the contract as a Type 1 dispute". Further, the written submissions advanced the proposition that even if the certification was in breach of the contract, the parties were aware of such a possibility at the time the contract was made, and agreed that resolution of all disputes was to be brought within the dispute resolution procedure. Further, that "payment of the sum certified allocated the risk pending resolution". Emphasis was placed on the word "any" in clause 76.8(g)(b)(ii), which provides that following certification, liquidated damages would be payable "notwithstanding any dispute in relation to such certification".

108 In response, the plaintiff submitted that the reference to a "dispute" in clause 76.8(g)(ii) concerned a dispute about "the facts and matters described in the payment mechanism of clause 42B", and not a dispute about whether the conditions precedent to the ability of the Certifier to make the certification had been met. It could be considered by way of "jurisdiction" analysis, and the question "is about the power of the Sub-IC to make any determination about LDs [liquidated damages] at this time". For that reason, contended the plaintiff, the fact that clause 76.8(g)(ii) requires payment notwithstanding any dispute had no application because there was a "(precursor) question about the power of the Sub-IC to make a determination at all in the circumstances". If the Certifier did not possess the power to make the determination, in such circumstances the plaintiff was not required to pay the sum certified.

109 It is clear that the issue of whether, notwithstanding the defence to the counterclaim, the plaintiff was liable to pay the liquidated damages on a provisional basis, was before the trial judge. That question was encompassed as the third issue identified by the trial judge, and was the subject of submissions. However, the answer given by his Honour in his reasons for decision was restricted to a determination that clause 76.8(g)(ii) requires payment of the sum certified notwithstanding the existence of a Type 1 dispute. The answer did not extend to the dispute raised in the counterclaim.

110 The trial judge was aware of the distinction between payment on a provisional basis of liquidated damages, and a final determination of the issues concerning liquidated damages. This distinction was emphasised during oral submissions on 13 April 2021 by counsel for the first defendant. It was contended that the estoppel argument did not "undercut the question of the certificate", and that there is a difference between payment on a provisional basis and "the final determination of the rights of the parties with respect to liquidated damages entitlements". Counsel urged that his Honour had determined that the contractual effect of the certificate was to give provisional entitlement to payment, to which his Honour responded "but not the interaction with estoppel". The same distinction was apparent in the responding submissions of counsel for the plaintiff:

"So the estoppel claim goes to the question of whether there is an obligation to make a provisional payment, as provided for in the contract".

111 The question whether the plaintiff was liable to pay the liquidated damages on a provisional basis under clause 76.8(g)(ii), notwithstanding the issues raised in the defence to the counterclaim, was identified as included in the third issue to be determined in the preliminary proceedings, and was addressed in submissions by counsel for the parties. However that question was not answered by the trial judge. His Honour found only that the plaintiff was required to pay the sum certified notwithstanding the existence of a Type 1 dispute. In addition, it is apparent from the submissions to which I have referred, and the comment of the trial judge during those submissions, that when his Honour delivered his reasons he did not address the question of whether the issues raised in the defence to the counterclaim were capable of providing an answer to the liability of the plaintiff otherwise to pay the liquidated damages on a provisional basis.

112 Further, in the ex tempore reasons for making the orders, the trial judge plainly took the view that regardless of the third question, the issue had not been fully argued before him on the hearing of the preliminary questions. No application was made for summary judgment on the counterclaim to the extent of judgment that the plaintiff is liable to pay liquidated damages on a provisional basis.

113 For these reasons, in my view the trial judge did not err in adjourning proceedings on the counterclaim, and the appeal by the first defendant should be dismissed.

[1] "Claim" is defined as meaning "any allegation, debt, cause of action, liability, claim, proceedings, suit or demand of any nature however arising and whether present or future, fixed or unascertained, actual or contingent, and whether at law, in equity, under statute or otherwise."

[2] Possession of the site passes to the first defendant after the certificate of Stage Practical Completion is issued.

[3] Development Agreement is defined as meaning the agreement between the Minister and the first defendant dated 3 December 2010 (as amended).

[4] Works is defined as meaning the Project Works and the Fitout Works.

[5] Obviously, the change in amount reflects the recognition of the parties that the rectification of defects in, or omissions from, the Project Works are likely to involve amounts less than those which might arise during the construction phase.