Caveats - Application to extend operation of caveats - Caveats securing payments to builder under building contract - Prior first mortgage for debt exceeding the market value of properties caveated - Agreement between proprietor and first mortgagee for first mortgage debt to be satisfied by sale of properties - Whether caveats should be extended in these circumstances

Building and engineering contracts - Bankers guarantee securing performance of works - Suspension of work by builder during defects liability period - Failure to remedy defects - Other claims and cross­claims between parties - Whether proprietor should be restrained from drawing down on guarantee

Transfer of Land Act 1893 (WA), s 138B, s 138C

Interlocutory injunction granted to restrain draw down on guarantee

American Cyanamid Co v Ethicon Ltd [1975] UKHL 1; [1975] AC 396

Castlemaine Tooheys Ltd v State of South Australia [1986] HCA 58; (1986) 161 CLR 148

Custom Credit Corporation Ltd v Ravi Nominees Pty Ltd (1992) 8 WAR 42

Halse v Embling, unreported; FCt SCt of WA; Library No 970734; 22 December 1997

Porter v McDonald & Registrar of Titles [1984] WAR 271

Barclay Mowlem Construction Ltd v Simon Engineering (Australia) Pty Ltd (1991) 23 NSWLR 451

Bomford v Barrett [2002] WASC 304

Eades v Reilly, unreported; SCt of WA; Library No 980675; 20 September 1998

Hewett v Court [1983] HCA 7; (1982) 46 ALR 87

Jandric v Jandric [1999] WASC 22

Lydon v Ryding [2002] WASC 308

Midland Brick Company Pty Ltd v Welsh [2002] WASC 248

Mott v Mount Edon Gold Mines (1994) 12 ACLC 319

Pearson Bridge (NSW) Pty Ltd v State Rail Authority of New South Wales (1982) 1 ACLR 81

Pindan Pty Ltd v Sunny's Redevelopment Pty Ltd & Anor [2001] WASC 104

Reed Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd (1999) 15 BCL 158

Selvas Pty Ltd v Hansen & Yuncken (SA) Pty Ltd (1987) 6 ACLR 36

Transfield Pty Ltd v Fuller - F L Smidth (Pacific) Pty Ltd and Deutsche Bank AG, unreported; SCt of NSW; Library No 55010; 9 May 1997

1 BLAXELL J: These are my reasons for decision on two separate applications, which by consent have been heard together. Each matter arises from a building dispute between the plaintiff as builder and the defendant as proprietor, which dispute is currently subject to arbitration. Both applications are made by the plaintiff and they are as follows:

• (No 1111 of 2004) An application to extend the operation of three caveats (Nos 1155702, 1155703 and 1350325) lodged against the titles to six separate strata title apartments owned by the defendant.

• (No 1239 of 2005) An application for an interlocutory injunction to restrain the defendant from drawing down on a bank guarantee for the sum of $448,125 provided by the Australia and New Zealand Banking Group Ltd. ("the Bankers Guarantee")

2 At the hearing on 28 April, I refused the first application and reserved my decision in respect of the second. I provided only brief reasons for decision in respect of the first application on the basis that these more complete reasons would follow.

3 At all material times the defendant was the developer undertaking the conversion of a substantial office building at the corner of St Georges Terrace and Victoria Avenue, Perth, into six levels of 108 strata-title apartments, a rooftop apartment and five strata-title retail units at ground level; ("the development").

4 On 5 February 2001 the defendant entered into a building contract with the plaintiff as builder, pursuant to which the development was to be constructed at a cost of $17,925,000. The contract was in a standard form ("JCC-D1994") and provided for practical completion within 52 weeks of 15 January 2001.

5 The building contract contained the usual provisions for progress payments to be made to the builder within five days of claims being certified by the architect. It also provided for a defects liability period of 52 weeks from the date of practical completion. Pursuant to the contract the plaintiff provided the defendant with the Bankers Guarantee to secure completion of the works.

6 At all material times it was within the contemplation of the parties that the defendant had not raised sufficient funds to meet all of the development costs, and that the plaintiff would accept partial payment under the contract by way of transfer of completed strata-title apartments. The parties also discussed similar transfers being made to subcontractors, but none of these arrangements or understandings were ever properly documented.

7 As I understand the facts, the construction of the development and the relationship between the parties proceeded smoothly up until the certification of the progress payments numbered 14 and 15. As the defendant failed to make payment on these certificates, the plaintiff served the appropriate notices under the contract and suspended work as from 14 May 2002.

8 There then followed negotiations between the parties, culminating in a written "Heads of Agreement" dated 27 June 2002. The Heads of Agreement essentially provided that:

• (cl A1) - Progress certificates 14, 15 and 16 would be satisfied by payment of the sums of $1,427,629 and $86,383; together with the early transfer (by 15 July 2002) to the plaintiff of five strata-title apartments valued at $1,806,163 which the plaintiff would accept by way of partial payment under the building contract.

• (cl A2) - The defendant granted the plaintiff a second mortgage over the penthouse apartment G901 to secure due and punctual payment by the Owner to the Builder of:

" ... all the present and future obligations and liabilities of the Owner to the Builder arising under or in connection with or provided for in the Building Contract until all claims (including rights sounding in damages only) are settled between the parties ..."

• (cl A3 and A4) - The defendant granted a charge over five other specified strata-title apartments (the "Mortgaged Units") to secure the due and punctual payment by the Owner to the Builder of:

"(1) all future progress certificates that may be issued; and

(2) any interest that may accrue on any unpaid progress certificate at the rate provided under the Building Contract,

• (cl A4) - The proceeds from the sale of the mortgaged units would be used firstly in satisfaction of moneys owing by the defendant to the St George Bank under a first mortgage for approximately $25,000,000, and then in satisfaction of payments under the Building Contract.

• (Sch to the agreement) - In the event of the sale of any of the mortgaged units before 31 October 2002, an equivalent strata-title apartment would be substituted and be subject to the charge.

• (cl A5) - Certain subcontractor payments totalling $500,817.90 would be satisfied by way of transfer to those subcontractors of other strata-title apartments.

• (cl B2) - The plaintiff would forthwith return to work and bring the works to practical completion as expeditiously as reasonably possible as contemplated by an annexed program of works showing a completion date of 31 July 2002.

• (cl B3 and B4) - The builder would make all claims under the building contract as expeditiously as reasonably possible and would defer enforcing payment of future progress certificates until 31 October 2002..

9 The plaintiff subsequently returned to work as agreed and on 2 September 2002 the architect issued a certificate of practical completion.

10 By 31 October 2002 (the date specified in the Heads of Agreement for payment of "future progress certificates") the architect had issued progress certificates up to certificate number 20. However, on 27 October 2002 the plaintiff had made progress claim number 21 in the sum of $1,208,493 which was not certified by the architect until 12 November 2002, and then for the sum of only $67,853.

11 In the meantime, the defects liability period had commenced as from the date of practical completion on 2 September 2002. Subsequently, there were communications from the architect to the plaintiff concerning alleged defects culminating in an instruction dated 3 December 2002 pursuant to cl 5.06 of the building contract. The plaintiff did not comply with that instruction and the defendant thereafter rectified some of the more urgent defects at a claimed total cost approximating $45,000. The bulk of the remaining defects were never rectified, although the plaintiff did remedy some unsafe balcony rails.

12 Numerous other issues have arisen between the parties and there are various claims and cross-claims. A major underlying cause of the problems between the parties is that the apartments in the development have not sold at the prices anticipated at the time of the Heads of Agreement. In that regard, four of the five apartments transferred to the plaintiff (pursuant to cl A1) are still unsold despite being offered for sale at 85 per cent of the defendant's list prices.

13 One of the issues between the parties is whether the defendant has met payment on all progress certificates under the building contract. Because the plaintiff claimed that some certified payments were outstanding, it issued a notice suspending the execution of the works as from 24 December 2002. The plaintiff thereafter took the stance that it had no obligation to remedy any of the alleged defects.

14 On 8 October 2002 the plaintiff referred the dispute between the parties to arbitration. On 8 December 2003 the Arbitrator issued a First Interim Award limited to certain issues of liability. The defendant then appealed from this award and was substantially successful (see the decision of Commissioner Odes QC in [2004] WASC 158). This decision in turn was the subject of an appeal by the plaintiff to the Court of Appeal (No 104 of 2004), which appeal is still to be heard.

15 Having issued a notice suspending the contract as from 24 December 2002, the plaintiff then purported to terminate it by notice dated 1 December 2004 and again by notice dated 28 January 2005. The plaintiff concedes that the first of these notices was invalid. The second notice of termination was based upon cl 12.04 of the building contract following receipt of a letter from the defendant's solicitors which is said to have indicated the defendant's insolvency.

16 That same letter from the defendant's solicitors (dated 24 January 2005) requested that the plaintiff withdraw the caveats it held over the mortgaged units and penthouse apartment so that those properties could be sold for a total sum of $4,800,000. The letter also informed the plaintiff that the residual first mortgage debt over the properties was $5,542,401.09, but that the first mortgagor was willing to accept the sale proceeds of $4,800,000 in satisfaction of the same.

17 The plaintiff refused to withdraw the caveats, and the defendant took steps towards their removal pursuant to s 138B of the Transfer of Land Act. That resulted in the plaintiff bringing the present application to extend the operation of the caveats.

18 By other correspondence through its solicitors the defendant has indicated its desire to draw down on the bank guarantee so that it can reimburse itself for the costs of rectifying defects. Consequently, the plaintiff also applies for an interlocutory injunction to restrain the defendant from taking that step.

19 Section 138C of the Transfer of Land Act 1893 (WA) provides the Court with a discretion to extend the operation of a caveat if "satisfied that the caveator's claim has or may have substance". This requirement will be met if there is evidence before the Court to show that the claim to an interest in the property does raise a serious question to be tried: (Custom Credit Corporation Ltd v Ravi Nominees Pty Ltd (1992) 8 WAR 42, 48).

20 In order to establish that there is such a "serious question", the caveator need only show that his claim is more than merely frivolous or vexatious, and that on the evidence before the Court he might ultimately succeed in establishing the interest on which the caveat purports to be founded: (Halse v Embling, unreported; FCt SCt of WA; Library No 970734; 22 December 1997).

21 Once it is established that there is such a serious question, the Court will exercise its discretion having regard to the same factors as would be relevant to an application for an interim injunction: (Porter v McDonald & Registrar of Titles [1984] WAR 271, 276). Accordingly, the caveator:

" ... must go on to show that on the balance of convenience it would be better to maintain the status quo until the trial of the action, by preventing the caveatee from disposing of his land to some third party." (Eng Mee Yong v Letchumanan (1980) AC 331)

22 Nevertheless, it is unusual to order the interlocutory removal of a caveat when there is an arguable case as to the existence of the caveatable interest. The purpose of the caveat is to restrain the registered proprietor from defeating the claimed proprietary interest pending a determination of the respective rights of the parties: (Custom Credit (ibid) at 50).

23 Before the Court can exercise its discretion to grant an interlocutory injunction in respect of the bank guarantee, the plaintiff must similarly show that there is a serious question to be tried; (viz. as to whether or not the defendant is entitled to draw down upon the bank guarantee). Once this is established, the Court must consider the balance of convenience and whether or not damages will be an adequate remedy in the event that either party is successful: (American Cyanamid Co v Ethicon Ltd [1975] UKHL 1; [1975] AC 396, 408). The degree of likelihood of success is a factor to be taken into account when considering the balance of convenience: (Castlemaine Tooheys Ltd v State of South Australia [1986] HCA 58; (1986) 161 CLR 148, at 154). Where other factors are evenly balanced, the appropriate course is to preserve the status quo: (American Cyanamid Co v Ethicon Ltd at 408).

Whether or not the caveats should be extended

24 The plaintiff must establish that there is a serious issue to be tried in respect of its claimed caveatable interest in each of the six strata title apartments (being penthouse apartment G901 and the "mortgaged units"). This question requires a consideration of clauses A2, A3, and A4, and the schedule in the "Heads of Agreement".

25 As to that, the view I take is that cl A2 clearly provides that until all claims arising from the building contract have been settled between the parties, the plaintiff has a continuing second mortgage interest in the penthouse apartment G901. It necessarily follows that I am satisfied that the plaintiff's claim the subject of caveat number 1155702 lodged against the title to that apartment "has or may have substance".

26 The proprietary interest claimed by the plaintiff in each of the remaining five apartments was created by cl A4 of the Heads of Agreement. That clause created a charge over the "Mortgaged Units" set out in the schedule to secure the due and punctual payment of "the Payments" referred to in cl A3.

27 The plaintiff contends that on a proper construction of cl A3, "the Payments" included all progress certificates subsequent to the date of the Heads of Agreement. The plaintiff further submits that "the Payments" also include interest on unpaid progress certificates regardless of when the certificate issued and irrespective of whether that interest accrued prior to or subsequent to the Heads of Agreement.

28 I consider that each of these propositions is untenable. As to the first proposition, cl A2 provided for a second mortgage security in respect of "all the present and future obligations and liabilities of the Owner" (emphasis added). The parties then went on to provide for additional security (by way of the charge over the "mortgaged units" created in cl A4) in respect of "the Payments" as separately defined and limited in cl A3. Those separate payments were "all future progress certificates that may be issued" together with "any interest that may accrue on any unpaid progress certificate", but only in respect of certificates that issued or interest that accrued "on or before 31 October 2002".

29 These words mean what they say, and I cannot see any room for a construction of cl A3 which extends the charge to progress certificates that issued after 31 October 2002.

30 With regard to the interest secured by the charge, the word "may" in subcl A3(2) cannot apply to any interest that is said to have accrued prior to the Heads of Agreement. In any event, the plaintiff's claims in respect of the progress certificates issued up until that date were "satisfied" by the payments and transfers in cl A1.

31 It is not in issue that one of the "mortgaged units" (apartment G505) was subsequently sold and that apartment G705 was substituted as security under the charge created by cl A4. In this regard, the schedule to the Heads of Agreement which identified the "mortgaged units" provided that:

" ... if settlement or the sale of all or any of the units so described occurs on or before 31 October 2002 then the charge referred to in clause 4 shall extend to and include the unit below.

G705 ...

A replacement unit to be nominated by the Builder with a market value at least equal to the unit sold for each of the above units so settled or sold will be subject to the charge."

32 The plaintiff submits that the effect of these provisions is that the defendant has an ongoing obligation (after 31 October 2002) to substitute replacement units in the event that any of the "mortgaged units" are sold. Accordingly, the defendant cannot remove the present caveats, unless it provides substitute security by way of other strata-title apartments of equivalent value.

33 In my view, the schedule to the Heads of Agreement is unambiguous in providing for substitution when "settlement or the sale of all or any of the units so described occurs on or before 31 October 2002". Once apartment G705 was substituted it was only in the event of any of the remaining units being "so settled or sold" that a further replacement unit had to be nominated. This clearly refers to settlement or sale of any remaining unit "on or before 31 October 2002."

34 Accordingly, the units that were subject to the charge as at 31 October 2002 remained subject to the charge and that became the fixed position from then on. Thereafter, the defendant was only entitled to a release of that security "upon the making of the Payments".

35 As to the question whether all of "the Payments" have been made, I consider that there is a serious issue to be tried only to the extent of $30,539.10 in respect of progress certificate number 20, (together with interest on that sum). Of course, it is not for me to determine whether or not that sum is in fact owing, and it is one of the many issues that will ultimately be determined by the Arbitrator. For present purposes, all that matters is my finding that to the extent of that amount the plaintiff's claim over the mortgaged units "may have substance". It follows therefore that there is a serious issue to be tried in respect of all caveats.

36 I now turn to the question of whether I should exercise my discretion under s 138C to extend the operation of the caveats. That question turns upon the balance of convenience bearing in mind that this will need to be an exceptional case if I am not to extend the caveats.

37 On the materials before me I am satisfied that this is such an exceptional case. In this regard, all six apartments the subject of the caveats are also subject to a first mortgage which secures a residual sum of $5,542.411.09. The defendant has entered into an agreement to sell all six apartments for the total sum of $4,800,000, and the first mortgagee has agreed to accept this amount in satisfaction of the first mortgage debt.

38 Although this total sale price of $4,800,000 is less than the original list prices for the apartments (as set out in the Heads of Agreement) the plaintiff accepts that it represents true market value. Accordingly, once the first mortgage debt is satisfied there is no residual value to be recovered under the charge the subject of the caveats.

39 It follows that an extension of operation of the caveats will confer no real benefit on the plaintiff. Such an order will, however, inflict devastating consequences on the defendant, given that it will then be unable to settle the sale of the six apartments and to satisfy its first mortgage debt.

40 In light of these considerations, the balance of convenience is overwhelmingly in favour of the defendant. Accordingly, in the exercise of my discretion I decided on 28 April 2005 that 1 should not order an extension of operation of the caveats.

Whether the defendant should be restrained from drawing down on the bank guarantee

41 The bank guarantee was provided by the plaintiff pursuant to cl 10.20 of the building contract, as "security for the due performance of his obligations under this agreement". The defendant's entitlement to draw down on the bank guarantee is governed by cl 10.25 of the contract which provides that:

"Any security provided by the Builder in terms of this Agreement shall be available to the Proprietor whenever the Proprietor shall be entitled to the payment of moneys by the Builder under or in consequence of this Agreement or whenever the Proprietor shall be entitled to reimbursement of any moneys paid to others under this Agreement, in such cases as if the security were a sum of money due to or to become due to the Builder by the Proprietor, provided that if the employment of the Builder under this Agreement is determined by the Builder pursuant to Clause 12.01 and the Proprietor holds any security provided by the Builder the Proprietor shall not be entitled to have recourse to that security unless and until an enabling award is made or an enabling judgment is given (whether pursuant to section 13 or otherwise) or the Builder agrees in writing that the Proprietor is so entitled."

42 It is also relevant to note the contractual provisions which enabled the defendant to rectify defects if the plaintiff failed to do so. Clause 6.11 required the plaintiff to "promptly make good" defects the subject of any "instruction" from the architect during the defects liability period stating "in what respects there are defects" as well as a reasonable time within which the same were to be rectified.

43 In the event of the plaintiff failing to comply with such an instruction, cl 5.06.02 enabled the defendant to "employ and pay others ... to give effect to such instruction". Subclause 5.06.03 went on to provide that all costs properly incurred by the defendant in so doing could be recovered as "a debt due to the proprietor by the builder" and could be claimed under the bank guarantee.

44 The defendant claims that, pursuant to cl 10.25, it is "entitled" to reimbursement of moneys that it either has expended or intends to expend in rectifying defects that the plaintiff has failed to remedy. The plaintiff denies that the defendant is so entitled, inter alia, for the following reasons:

• When purporting to give an instruction to rectify defects under cl 6.11.01 of the contract, the architect failed to properly identify such defects.

• That instruction also failed to specify a reasonable time within which the builder was to make good the defects.

• The plaintiff validly suspended the contract as from 24 December 2002, and this had the effect of relieving the plaintiff of any obligation to rectify defects.

• The plaintiff validly terminated the building contract on 28 January 2005 on the grounds of the defendant's insolvency, and accordingly the latter is not entitled to have recourse to the bank guarantee until there is an enabling award in the arbitration (the plaintiff not having otherwise agreed in writing).

45 For the purposes of understanding these (and other) issues, counsel have spent considerable time in taking me into much of the documentation surrounding the building dispute. All of these matters will ultimately be determined in the arbitration which is currently the subject of the appeal, and my role in examining the evidence and deciding whether or not to grant an interlocutory injunction is simply to assess the relative strengths of the opposing cases in respect of each issue.

46 It is obviously inappropriate that I should go into any great detail in making that assessment. In broad terms, I consider that there is a serious issue to be tried in respect of the validity of the architect's instruction under cl 6.11. That instruction was somewhat vague in identifying defects, and its validity may well turn on evidence of previous communications and discussions between the architect and the plaintiff. The reasonableness of the period of five days that was specified for rectification will also depend upon evidence as to those matters.

47 The plaintiff's notice suspending the contract as from 24 December 2002 did so on the grounds of the defendant's alleged failure to pay $30,539.10 under progress certificate number 20, $67,853 under progress certificate number 21, and $75,030.37 interest on progress certificates numbered 14 to 20. In my view, the plaintiff could not validly claim the interest said to have accrued prior to 27 June 2002, but I am unable to make an adequate assessment of the claims for the remaining amounts (other than the sum of $30,539.10 previously referred to). In all of the circumstances, I consider that there is a serious issue to be tried in respect of the validity of the suspension and the impact that this had on the plaintiff's obligation to rectify defects.

48 I consider that the plaintiff has a weak, but nevertheless arguable case, that the defendant's solicitor's letter of 24 January 2005 had the effect of informing "the other party in writing ... that the party is insolvent" within the meaning of cl 12.02.01. Accordingly, there is also a serious issue to be tried as to whether the plaintiff validly determined the contract on 28 January 2005, thus preventing any drawdown on the bankers guarantee until the finalisation of the arbitration.

49 I next turn to the question of the balance of convenience. In this regard the plaintiff has raised justifiable concerns that any call upon the bankers guarantee will affect its business standing and financial reputation. To meet these concerns, the defendant has given appropriate undertakings that it will not draw down on the guarantee for at least seven days following my determination of the present application, that such drawdown will be limited to $45,000, that it will agree to the release of $250,000 of the guarantee, and will also agree to the balance being placed in a joint trust account, pending finalisation of the arbitration.

50 In the end, therefore, the balance of convenience turns on the relative prejudice to each of the parties if the plaintiff is required to pay (or alternatively is not required to pay) $45,000 to the defendant. Without in any way trivialising this question, it is obviously a relatively minor issue in the context of a major dispute involving a $20,000,000 construction contract.

51 In my view, the balance of convenience favours the maintenance of the status quo so that all issues (including the entitlement of the defendant to draw down on the bank guarantee) can be finally determined in the arbitration. I accordingly intend to grant the interlocutory application restraining the defendant from drawing down upon the bank guarantee.