Icon Co (NSW) Pty Ltd v Australia Avenue Developments Pty Ltd

Supreme Court of NSW|2020-02-26|Before: Stevenson J

Solicitors: MinterEllison (Plaintiff) HWL Ebsworth Lawyers (Defendant) File Number(s): 2020/41060

Judgment

By a design and construct contract ("the Contract") dated 29 October 2015 between the plaintiff, Icon Co (NSW) Pty Ltd ("the Builder"), and the defendant, Australia Avenue Developments Pty Ltd ("the Principal"), the Builder agreed to design and construct the high-rise mixed residential and commercial development known as "Opal Towers" located at Sydney Olympic Park.
On 4 February 2020 the Principal gave the Builder notice that it proposed to call on an unconditional and irrevocable bank guarantee ("the Guarantee") in a sum in the order of $3.9 million established by the Builder under the Contract.
The Builder seeks to restrain the Principal from calling on the Guarantee.
It is common ground that, were I to conclude that the Principal should not be so restrained, the Principal will accept an equivalent cash payment from the Builder in lieu of calling on the Guarantee and undertakes not to call on the Guarantee if such cash payment is made. There is no suggestion that the Builder is unable to make such a payment.

Decision

The Builder has not established that the Principal is not entitled to call on the Guarantee.
In any event, in the particular circumstances of this case, I am not satisfied that damages would not be an adequate remedy for the Builder.
Accordingly the proceedings should be dismissed.

The cracking at Opal Towers

On 24 December 2018 damage was identified on a level of Opal Towers. The building was vacated. Residents returned to the building shortly thereafter.
However, on 27 December 2018 further damage was identified on another level of the building. The building was again vacated.
The Builder has worked to rectify the problem. It has, it says, expended some $25 million endeavouring to do this. The residents have returned progressively. The last residents returned in December 2019.
The damage has been the subject of investigations, including by experts appointed by the NSW Minister for Planning and Housing.
On 19 February 2019 those experts provided advice to the Minister to the effect that the cracking at Opal Towers had been caused by deficiencies in the design and construction of the building.
The experts concluded that: 1. a hob beam/panel assembly had been under-designed at a number of locations in the building rendering the hob beam susceptible to failure by shear compression and bursting; 2. grouting between the joists between the hob beams and panels significantly raised the levels of stress in hob beams on four levels of the building; 3. construction and material deficiencies precipitated the observed major damage to the hob beams on a particular level; and 4. the observed damage in concrete panels was caused as a consequence of hob beam failures.
The Principal has commenced proceedings against the Builder in this Court for various forms of relief, including for breach of contract and misleading or deceptive conduct. In those proceedings the Builder has cross-claimed against its subcontractor, WSP Structures Pty Ltd which designed the works of the buildings.
The owners of lots in the building have commenced representative proceedings against the Sydney Olympic Park Authority. The Authority has joined both the Builder and the Principal as cross-defendants in those proceedings.
The principal contention advanced by the Builder in both those proceedings is that the cracking that has appeared in the building was caused by defects in the design prepared by WSP Structures.

The Security Recourse Events

Clause 5.1 of the Contract provides that the Builder must provide "security" (that is, the Guarantee) "for the purpose of securing the proper performance of [its] obligations to the Principal under the Contract".
The circumstances in which the Principal may have recourse to the Guarantee are set out in cl 5.2 which provides, emphasising the words relied on by the Principal: "5.2 Recourse It is the intention of the parties that: (a) [The Principal] may have recourse to any security if any of the following events ("Security Recourse Event") occur: (i) where [the Principal] (as the case may be) is entitled to exercise a right under the Contract in respect of the security; (ii) where [the Builder] has failed to comply with a material obligation under the Contract; (iii) where there is a debt payable by [the Builder] to [the Principal]; or (iv) subject to clause 37.4, to meet any genuine bona fide claims that [the Principal] may have against [the Builder] arising out of or in connection with the termination of the Contract, the parties acknowledge and agree that if any of the events in subclause 5.2(a)(i) to subclause 5.2(a)(iv) occur, the Principal may (subject to [the Principal] have given [the Builder] at least 5 days' notice of the Security Recourse Event) have recourse to any security…" (Emphasis added.)
The Principal contends it is entitled to call on the Guarantee because: 1. it is "entitled to exercise a right" under the Contract for the purpose of cl 5.2(a)(i); and 2. the Builder has "failed to comply with a material obligation" under the Contract for the purposes of cl 5.2(a)(ii).

First Security Recourse Event - the Principal's entitlement to exercise a right

The "right" that the Principal contends it is entitled to exercise is the right to deduct from the security "moneys claimed" by it pursuant to cl 37.4(b) of the contract.
Clause 37.4 provides, emphasising the words relied on by the Principal: "37.4 Deduction of Moneys Any debt due from [the Builder] to [the Principal] or moneys claimed by [the Principal] from [the Builder] under or in connection with this Contract or the WUC [work under contract] may be deducted by [the Principal] from: (a) any moneys which may otherwise become payable to the Contractor by the Principal; and (b) any security held by the Principal. This clause does not affect the right of the Principal to recover the debt, the moneys claimed or any balance after exercising any rights under this clause by any other means available under this Contract or at law." [Underlined emphasis added.]
In a letter dated 4 February 2020, the Principal specified the "moneys claimed" as: "(a) The costs of defending the class action (Supreme Court of NSW Proceedings 2019/00232749) that has been commenced against SOPA to which the Principal has been joined; (b) Damages for breach of contract associated or arising out of defects in the [work under contract]; (c) Damages by reason of the Contractor failing to indemnify the Principal for the losses the Principal has suffered and continues to suffer by reason of the defects in the [work under contract] that has resulted in a loss of sales of apartments in Opal Tower; and (d) The additional costs of administering the Contract as a direct consequence of the defects in the [work under contract] and the necessity to extend the defects liability period by reason of defects in the WUC." (Emphasis in original.)
The Principal stated that it had "assessed" its claim as exceeding $6.795 million.
On the face of cl 37.4, the Principal is entitled to deduct from moneys that may otherwise be payable by it to the Builder, and to have recourse to the Guarantee for: 1. "any debt due" from the Builder to it under or in connection with the Contract; or 2. "any … moneys claimed" by it from the Builder under or in connection with the Contract.
The use in the chapeau to cl 37.4 of the words "any debt due" in conjunction with, only a few words later, "or moneys claimed" suggests that the parties intended those words to have different consequences.
A "debt due" from the Builder to the Principal may well be one that must be found "as a matter of objective fact" (to adopt the language of Macfarlan JA in Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd [2010] NSWCA 283 at [41]) or to be a result of the Builder being "actually in default" (to adopt the language of White J in Universal Publishers Pty Ltd v Australian Executor Trustees Ltd [2013] NSWSC 2021 at [44]-[46]).
On the other hand, "moneys claimed" by the Principal from the Builder would seem, on the face of it, to require no more than that the Principal in fact make a "claim" for the moneys and that such claim be "genuine" and "bona fide" (words actually used in cl 5.2(a)(iv) to which I will return). That is, the "claim" must be "non-fraudulent" and "genuine" and not "specious, fanciful, or untenable" (to adopt the words of Pembroke J in FMT Aircraft Gate Support Systems v Sydney Ports Corporation [2010] NSWSC 1108 at [13]-[14]).
Mr Miller SC, who appeared with Mr Smith for the Builder, submitted that the words "or moneys claimed" in cl 37.4 should be read so that the "right" exercisable by the Principal, for the purposes of cl 5.2(a)(i), only arises if the Principal was entitled to claim the moneys in question. That is, only if the moneys were "actually" due.
But that is not what cl 37.4 says. Indeed, as I have said, the clause draws a distinction between a "debt due" and "moneys claimed".
Mr Miller developed his argument by reference to cl 37 as a whole, and in particular cl 37.2.
Clause 37 deals with "Payment". Clause 37.1 provides for the making by the Builder of a payment claim.
Clause 37.2 provides for the creation by the Superintendent, on behalf of the Principal, of a progress certificate which sets out, amongst other things: "…the amount the Principal is entitled to retain, deduct, withhold or set-off pursuant to subclause 37.4 or otherwise under the Contract".
Mr Miller submitted that if, under cl 37.4, the Principal could simply deduct from the amount payable to the Builder any money it "claimed" to be due to it, it "would make inutile the whole 37.2 process, and in particular the 37.2(e) process".
Mr Miller submitted that the reference in cl 37.2(e) to the amount that the Principal is "entitled" to deduct from the Builder's payment claim necessarily informs the manner in which cl 37.4 should be construed.
Thus Mr Miller submitted: "[The Superintendent] is not just there as a rubber stamp. He has an assessment and valuation exercise. He has an obligation under 37.2 not merely to receive and act upon [the Principal's claim] but to consider so as to come up with an entitlement".
In argument, I asked Mr Miller what changes would need to be effected to the wording of cl 37.4 to reconcile that subclause with such a reading of cl 37.2.
Mr Miller submitted that the words "moneys claimed" in cl 37.4 should be read as if they said something to the effect "moneys the Principal is entitled to claim".
Alternatively, Mr Miller submitted, the chapeau to cl 37.4 should be read as if it said: "The net amount payable to the Principal under cl 37.2 taking into account any debt due from the contractor or moneys claimed, et cetera, will become payable…".
I see two problems with these submissions.
First, they do considerable violence to the wording of cl 37.4 and in substance involve a re-writing of the clause.
Second, they overlook the fact that the reference in cl 37.2(e) to the amount that the Principal is "entitled" to retain is a reference to such "entitlement" under cl 37.4.
In my opinion, there is no tension between the two clauses. The Principal is "entitled" under cl 37.4 to deduct from money otherwise payable by it to the Builder "moneys claimed" by it under or in connection with the Contract. Under cl 37.2 the Superintendent must set out in the progress certificate any such amounts.
The primacy thus accorded to the Principal's "claim" is confirmed in this paragraph which appears later in cl 37.2: "Failure by the Superintendent to set out in a progress certificate an amount which the Principal is entitled to retain, deduct, withhold or set-off from the amount which would otherwise by payable to [the Builder] by the Principal will not prejudice the Principal's right to subsequently exercise its right to retain, deduct, withhold or set-off any amount under the Contract."
Such primacy is also confirmed by provisions of cl 37.2A of the Contract, which deal with "Payment" and provide, in terms, that the Principal's obligation to pay the "scheduled amount" to the Contractor is subject to cl 37.4(a).
For those reasons, I see nothing in cl 37.2 to compel the conclusion that cl 37.4 should be read otherwise than in accordance with its terms.
Mr Miller also submitted that a literal wording of cl 37.4 would render otiose sub-cl 5.2(a)(iv) which, to repeat, provides that there is a "Security Recourse Event": "subject to clause 37.4, to meet any genuine bona fide claims that the Principal may have against the Contractor arising out of or in connection with the termination of the Contract".
If, Mr Miller submitted, the effect of cl 5.2(a)(i), when read with cl 37.4, is that there is a Security Recourse Event because the Principal's "entitlement to exercise a right" under cl 5.2(a)(i) arises under cl 37.4 simply because it "claims" that "moneys" are due, there would be no point in the parties also providing, in cl 5.2(a)(iv), that the Security Recourse Event arises if the Principal has a genuine bona fide claim against the Builder of the kind there set out.
It is common ground that a "claim" made by the Principal under cl 37.4 must be a "genuine bona fide claim" (see [27] above). This requirement appears in terms in cl 5.2(a)(iv).
The difference between the two clauses is that the "moneys claimed" in cl 37.4 must be "under or in connection with the Contract" whereas the "genuine bona fide claims" referred to in cl 5.2(a)(iv) must be ones "arising out of or in connection with the termination of the Contract" (emphasis added).
Mr Braham SC, who appeared with Mr Gray, accepted that this was a "drafting curiosity".
He submitted: "In either case it has be to genuine and bona fide, and really what Mr Miller is saying, 'Well, I can't see the difference'. If it's arising out of or in connection with the termination of the contract surely it is also, 'under or in connection with the contract or the works,' so you don't need both clauses. But that's really the weakest form of contractual construction principle, because sometimes people do write overlapping clauses, for abundance of caution, and what this drafter has done is clearly provided for a right of access to the security for any claim by the principal from the contractor, which is either under or in connection with the contract or the works, or arising out of or in connection with the termination of a contract."
I agree. I do not see this "drafting curiosity" as a reason to read down the clear wording of cl 37.4.
For those reasons, the Builder has failed to establish that the first Security Recourse Event on which the Principal relies is not available.

Second Security Recourse Event - failure to comply with a material obligation

The second Security Recourse Event on which the Principal relies is that the Builder has "failed to comply with a material obligation under the Contract".
Under cl 2.1 of the Contract, the Builder's fundamental obligation is to "carry out and complete the WUC", being "the work under the Contract".
"WUC" is defined to mean: "… the work which [the Builder] is or may be required to carry out under the Contract and includes…remedial work."
By cl 2.2(h) of the Contract, the Builder warranted to the Principal that: "…it shall execute the WUC in a proper and workmanlike manner and in accordance with the high quality workmanship of the various trades involved".
In its letters of 4 February 2020, giving notice of its intention to call on the Guarantee, the Principal nominated nine clauses of the Contract said to impose on the Builder "material obligations" with which it had failed to comply.
In its written submissions, the Principal focussed on cl 2.2(h). There was no dispute before me that the Builder's obligations under cl 2.2(h) were "material obligations" for the purposes of cl 5.2(a)(ii).
Mr Miller emphasised in submissions that the Builder's obligation to "execute the WUC in a proper and workmanlike manner" for the purposes of cl 2.2(h) included an obligation to carry out "remedial work". Mr Miller pointed out that under cl 35 of the Contract (which deals with "Defects Liability") the Builder must rectify defects existing at the date of practical completion, as well as those identified by the Superintendent during the defects liability period.
Mr Miller submitted: "…in the period following practical completion, [the Builder] has expended a large sum of money (over $25 million) rectifying the affected areas of common property in the building in accordance with its obligation to rectify defects that existed at the date of practical completion in the post-practical completion period. That process is ongoing. In continuing to undertake such work, it is continuing to 'execute the WUC'. Put another way, any 'breach' of the clause 2.2(h) warranty obligation stands to be assessed at final completion - not at practical completion, or indeed at any point anterior to that. [The Builder] is continuing to perform. … …the question that is posed by cl 2.2(h) (i.e. whether [the Builder] 'execute[d] the WUC in a proper and workmanlike manner…') requires an assessment of [the Builder's] execution of the WUC as a whole. Such assessment cannot logically take place until after [the Builder] has finished executing the WUC. In undertaking remedial work, [the Builder] is continued to execute the WUC. The security purpose is being achieved - [the Builder] has attended (or is attending) to defect rectification. The time for assessing whether [the Builder] has performed to the standard required by cl 2.2(h) has therefore not arrived. Recourse to security by reference to that clause is premature."
Mr Miller pointed to cl 37.5 of the Contract which provides for the issue of a "Final Certificate" on "the completion of all obligations of the [Builder] under the Contract".
It may be that it cannot yet be determined whether the Builder has "carried out and completed" the WUC in accordance with its obligations under cl 2.1 of the Contract, nor whether the Builder has completely executed the WUC in accordance with its obligations under cl 2.2(h) of the Contract. But it does not follow that the Builder has hitherto complied with its obligations under cl 2.2(h).
That is because that obligation included "the work which the [Builder] is required to carry out and complete under the Contract" as well as any "remedial work" that might be required by reason of shortcomings in work done earlier.
As Hammerschlag J said in Owners of Strata Plan 80458 v TQM Design & Construct Pty Ltd [2018] NSWSC 1304 at [194], in the course of rejecting the "temporary disconformity theory" contended for in that case: "If a contract requires work to be done in a proper and workmanlike fashion and the builder does defective work, it is difficult to understand why, even if the work is later remedied, there was no initial breach. The contract might provide a mechanism to assuage the breach and avoid loss which might otherwise be suffered if the breach were not remedied, but the initial breach still occurred. The conventional approach would be to consider whether given other contractual provisions and the conduct of the employer, the employer has an exigible claim for damages."
Part of the work that the Builder was obliged to "carry out and complete" under cl 2.1 of the Contract and thus to "execute the WUC in a proper and workmanlike manner" for the purposes of cl 2.2(h) was to ensure that the WUC reached practical completion by the date for practical completion; that is, as at 8 August 2018.
That obligation was imposed by cl 34.1 of the Contract. That clause was not nominated by the Principal in its 4 February 2020 letter but is necessarily related to the nominated obligation under cl 2.2(h).
"Practical Completion" is defined in the Contract as "that stage in the carrying out and completion of the WUC" when the "Works" (defined to mean the "work to be carried out and completed in accordance with the Contract") are "complete and fit for use occupation except for minor defects".
It is now clear that the Builder did not comply with that obligation. The "Works" were not fit for use and occupation as at 8 August 2018. The residents were evacuated a few months later because of defects that must have been present at the date of practical completion.
This was a failure by the Builder "to comply with a material obligation of the Contract".
Mr Miller submitted that an inquiry into the question of whether "Practical Completion" as defined in the Contract, had in fact been achieved, was now foreclosed because the Superintendent had given under cl 34.6(b) a "certificate of practical completion evidencing the date of practical completion".
Mr Miller referred to the decision of the Court of Appeal in Abergeldie Contractors Pty Limited v Fairfield City Council [2017] NSWCA 113 at [40]-[47]. In that case Basten JA, with whom Beazley ACJ and Meagher JA agreed, held that the issue of a certificate of completion by a superintendent, under a clause materially the same as cl 34.6(b)(i) of the Contract, was conclusive evidence of when the date of practical completion had occurred. That has important consequences for such matters as the commencement of the defects liability period under cl 35 of the Contract and the Principal's entitlement to liquidated damages under cl 34.7.
Thus, as Mr Braham accepted, the certificates are conclusive evidence that the date of practical completion in this case was 8 August 2018.
But the certificates under cl 34.6(b) cannot be determinative of whether, as a matter of fact, the requirements for practical completion were in fact achieved by the date of practical completion. Nor can they operate to waive or release any breach of the Contract by the Builder which then existed. I think Mr Braham was correct to submit that the phrase "practical completion" is a reference to the underlying condition of the building, namely being "complete and fit for use and occupation except for minor defects": see [68] above. This is to be contrasted with the phrase "date of practical completion" which is a reference to a date fixed by the Superintendent and which, as I have said, sets time running in relation to other aspects of the Contract.
The evidence before me points strongly to the conclusion that, notwithstanding the certificate givens the by Superintendent as to the date of practical completion, practical completion had not in fact then occurred.
As the Builder needs to establish a negative stipulation, namely that the Principal is not entitled to recourse to the Guarantee, it is for the Builder to establish that it has not failed to comply with a material obligation under the Contract and thus, relevantly, that it had complied with its obligations under cl 2.2(h) and, thus, its obligations under cl 34.1.
In my opinion, it has not done so.
Accordingly, the Builder is not entitled to restrain the Principal from calling on the Guarantee on this basis.

Damages not shown to be an inadequate remedy

In any event, even if I am wrong in coming to the above conclusions, I would not grant the Builder the injunctive relief it seeks because I am not satisfied that the Builder has shown that damages would not be an adequate remedy.
Campbell JA observed in Lucas Stuart v Hemmes Hermitage at [5]: "The only justification for equity ever involving itself in providing a remedy for breach of a common law obligation is if the remedy provided by the common law is inadequate."
Usually, in a case where a contractor seeks to restrain a principal from calling on a bank guarantee, the contractor can point to the prospect of reputational damage likely to occur were it to become known that such a call had been made.
Thus, in Lucas Stuart v Hemmes Hermitage Macfarlan JA said at [45]: "Courts have recognised on a number of occasions that calls upon performance bonds may cause significant damage to a contractor's reputation and financial standing that is not readily curable by an award of damages (see for example Barclay Mowlem Construction Ltd v Simon Engineering (Aust) Pty Ltd (1991) 23 NSWLR 451 at 461-462 and Reed Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd (1999) 15 BCL 158 at 167)."
Ms Michelle Knight, employed by the solicitors for the Builder, has given evidence on information and belief that if the Principal were to have recourse to the Guarantee this would: "impact [the Builder's] relationship with [the Bank] such that it will, or may, in the future be difficult for [the Builder] to obtain a bank guarantee from [the Bank], or any other providers of such guarantees. In this respect, I am also informed…: i. that it is common when seeking to obtain bank guarantees for the party seeking such to have to disclose if it has ever had any calls made on such guarantees or bonds in the past; and ii. that positive responses in that regard negatively impact on bond / guarantee providers' willingness to furnish such facilities".
But here, regardless of the outcome of these proceedings, there will be no call on the Guarantee. That is because, as set out at [4] above, the Principal has agreed to accept a cash payment from the Builder in lieu of calling on the Guarantee and has undertaken not to call on the Guarantee if such cash payment is provided.
Although Mr Miller submitted that payment of $3.9 million would be "an obvious impost on any person or entity in business" there is no suggestion, let alone evidence, that the Builder cannot provide such a payment. Nor is there any evidence that the making of such a payment would have any adverse impact on its operations.
Mr Miller drew attention to authority to the effect that in the case of a breach of a negative covenant in a contract "the correct approach is to grant the injunction unless there are good reasons to the contrary": Maggbury Pty Ltd v Hafale Australia Pty Ltd (2001) 210 CLR 181; [2001] HCA 70 at [102] (Callinan J). In my opinion, the matters set out in the previous paragraph and at [4] constitute "good reasons to the contrary".
I find this to be a further reason to decline to give the Builder the relief it seeks.

Conclusion

The proceedings should be dismissed.
I shall hear the parties as to costs.

Amendments 05 March 2020 - Cover Page - inserted the word "written" before the word "submissions" in the "Hearing dates" section DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 05 March 2020

At a glance

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Judgment (10 paragraphs)

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Cases Cited (8)

Cited By (1)