Lucas Stuart Pty Limited v Hemmes Hermitage Pty Limited

Supreme Court of NSW|2010-09-14

CITATION : Lucas Stuart Pty Limited v Hemmes Hermitage Pty Limited [2010] NSWSC 1101

DECISION : I dismiss the notice of motion filed 13 September 2010 by Lucas Stuart Pty Limited with costs.

CATCHWORDS : Contracts - Building, engineering and related contracts - Application to restrain calling up of performance guarantees under contract - Whether prima facie case established - Consideration of whether there need only be genuine dispute as to whether there had been default necessary to enliven contract right to call on guarantees

LEGISLATION CITED : Trade Practices Act 1974 s 51AA

Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd (No 3) [2007] FCA 2082 Clough Engineering Limited v Oil and Natural Gas Corporation Limited (2008) 249 ALR 458; [2008] FCAFC 136 FPM Constructions Pty Ltd v Council of the City of Blue Mountains [2005] NSWCA 340 Honeywood v Munnings (2006) 67 NSWLR 466 CASES CITED : Hounslow London Borough Council v Twickenham Garden Developments Ltd (1971) 1 Ch 233 Re Stewardson Stubbs and Collett Pty Ltd v Bankstown Municipal Council (1965) NSWLR 1671 Reed Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd (1999) 15 BCL 158 Rejan Constructions Pty Ltd v Manningham Medical Centre Pty Ltd [2002] VSC 579; (2003) 19 BCL 451 Tameside Metropolitan Borough Council v Barlow Securities Group Services Ltd (2001) EWCA Civ 1; (2001) BLR 113

TEXTS CITED : Ian Duncan Wallace, Hudson Building and Engineering Contracts Vol 1, 11th ed (1989) Sweet & Maxwell

PARTIES : Lucas Stuart Pty Limited Hemmes Hermitage Pty Limited

COUNSEL : Mr G A Sirtes SC with Mr D Hand (plaintiff) Mr S A Kerr SC with Mr T Breakspear (defendant)

SOLICITORS : BCP Lawyers & Consultants (plaintiff) Mallesons Stephen Jaques (defendant)

27 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION TECHNOLOGY & CONSTRUCTION LIST

2009/298813 Lucas Stuart Pty Limited v Hemmes Hermitage Pty Limited

JUDGMENT 1 His Honour: This is the hearing of a notice of motion filed 13 September 2010 in which the plaintiff builder seeks to restrain the defendant proprietor from converting unconditional performance bonds given by the insurance company on behalf of the builder. A Judge of the court has referred the hearing of the proceedings to an Associate Judge of the court. 2 On 8 November 2006, the plaintiff entered into a contract with the defendant for the construction of a new multi storey retail, bar, restaurant and function centre known as "the Ivy" at 320 and 330 George Street, Sydney for the sum of $65,446,520 plus GST ("the project"). 3 The role of Caverstock Group Pty Limited under the contract is similar to that of a superintendent and is described as the project director. 4 The project was divided into three separate parts. 5 The plaintiff commenced proceedings against the defendant in April 2009, when it obtained interim orders restraining the defendant from calling upon unconditional undertakings provided by the plaintiff under the contract. By consent, the orders continue to operate. 6 Pursuant to clause 6.1 of the contract the plaintiff was required to provide security to the defendant in the sum of 2.5 per cent of the unadjusted contract sum of the contract. 7 Pursuant to clause 16.1 the defendant must return the securities as follows: (i) one undertaking within 15 business days of the last date of practical completion; and (ii) one undertaking within 15 business days of the date of final completion. 8 On 26 July 2007 the separate parts and the security for each separate part were varied. 9 The effect of the variation was to require the plaintiff to provide six unconditional undertakings issued by QBE Insurance (Australia) Limited ("QBE") for each of the three separate parts. Two undertakings were provided for each separate part as follows: (i) a performance undertaking to be released on the date of practical completion of each separate part; and (ii) a maintenance undertaking for the period to final completion. 10 The defendant still holds the following securities, totalling $1,636,163: (i) in respect of separate part 1: maintenance undertaking by QBE (bond number 40) in the sum of $820,599; (ii) in respect of separate part 2: maintenance undertaking by QBE (bond number 41) in the sum of $726,912.50; (iii) in respect of separate part 3: maintenance undertaking by QBE (bond number 37) in the sum of $88,651.50. 11 On 19 July 2010 the defendant issued a notice under clause 16.2 of the contract ("the notice"). 12 Clause 16.2 of the contract provides: Principal notice to remedy breach of the contract by the contractor 16.2 If the contractor has not materially complied with its obligations under this contract, the principal may give a written notice to the contractor stating: 16.2.1 The contractor's breach. 16.2.2 What the principal requires the contractor to do to remedy the breach. 16.2.3 A specific reasonable time in which the contractor must remedy the breach. 13 The remedy for default is provided for in clause 16.3 which is in these terms: 16.3 If the contractor fails to comply with the terms of the notice given under clause 16.2 before the date of final completion, the principal may convert any unconditional undertaking into cash, or may spend any retention it holds, and may apply the cash proceeds of any unconditional undertakings, or the cash retention, to either of the following: the cost of remedying the Plaintiff's breach, or compensation for the cost or direct damages consequent on the contractor's breach. 14 The notice given was in the following form:

"Dear Sirs "The Ivy" - 320 and 330 George Street, Sydney - Dispute between Lucas Stuart Pty Ltd ("Lucas Stuart") and Hemmes Hermitage Pty Ltd ("HHPL")

NOTICE PURSUANT TO CLAUSE 16.2 OF THE CONTRACT Pursuant to clause 16.2 of the contract, we hereby notify Lucas Stuart that: 16.2.1 - Lucas Stuart's breaches 1 Lucas Stuart has committed the following breaches of the contract, which comprise material non-compliances with its obligations: (a) the existence of the defects identified in the attached defects program ("Defects Program"), (breach of clauses 2.1 and 10.1 of the Contract); (b) Lucas Stuart's failure to rectify the defects identified in the Defects Program (breach of clauses 2.1.2 and 10.15 of the Contract). 16.2.2 - What Lucas Stuart is required to do to remedy the breaches

2 In order to remedy the breaches, HHPL, as Principal, requires Lucas Stuart to rectify the defects identified in the Defects Program ("Defects Rectification Work"),

16.2.3 - The reasonable time in which Lucas Start must remedy the breaches

3 HHPL requires Lucas Stuart to remedy its breaches by: (a) commencing the Defects Rectification Work in line with the Defects Program by no later than 26 July 2010, being 7 days from the date of this letter (week 1 of the Defects Program to be the week beginning 26 July 2010); and (b) completing the Defects Rectification Work within the reasonable time specified in the Defects Program, being by Saturday, 25 September 2010.

Please note the following: 4 The Defects Program comprises three sheets, one for each Separate Part. 5 The defects identified in the Defects Program can be cross-referenced by the Defect No. in the third column of the Defects Program to the defect numbers in the first column of the defects schedule, which was served as Annexure A to our amended cross-claim list statement in the Supreme Court proceedings on 26 May 2010. A copy of Annexure A is attached for your reference. 6 The Defects Program allows for a one week administration/mobilisation/procurement period at the beginning of the program. 7 The program logic is based on a 2-man gang size. The gangs are identified on the program, e.g. "GB4" means "General Building works - gang 4". 8 The program is based on 6 working days per-week and 8 hour shifts. Access for 7 working days per-week can be accommodated should Lucas Stuart require additional time. 9 The program is based on access to the building for Lucas Stuart's workforce between 3.30am and 11:30am for each of the 6 working days. As you are obviously aware, HHPL occupies the premises and operates the building as a hotel and entertainment complex. Accordingly, the working days and access times set out in paragraphs 8 and 9 above are the maximum access times available, without requiring HHPL to cease trading.

HEMMES HERMITAGE PTY LTD" 15 As is immediately obvious the notice is addressing defects and encloses a defect program in respect of 154 defects. Importantly it alleges that the defects in the program comprise "material non compliances" with the builder's obligations. 16 The parties became at issue over the notice and the program referred to which required completion of the work by 25 September. The defendants has agreed with certain extensions of the program to accommodate this hearing. 17 The defect list to which I have just referred does not purport to have anything to do with the contractual regime for defects. Three days earlier on 16 July 2010 the project director had certified practical completion of the several parts 2 and 3 of the contract. In the course of doing so he issued a defects list pursuant to clause 10.15 of the contract. This was subject of some debate before me. Having regard to the terms of clause 10.15, which uses "may" in specifying what is to be included in the notice and having regard to the statements attached to the schedule of defects, which were included with the assessment of practical completion, it seems to me that it is arguably a notice under clause 10.15. It also seeks to accelerate the work under clause 12.8 of the contract. 18 There were 1324 general defects and 197 items of water leaks referred to in the notice. It requires the completion of the directed work by the end of the defects liability period, namely, by 30 June 2011. 19 The defects list attached to the clause 16.2 notice has 154 items drawn from a defects list prepared by a consultant to the proprietor, Mr Abbott. His final list of 1215 defects was produced in May 2010 and is the basis of the defendant's cross claims against the builder. 20 To add to the confusion for the contractor, clause 10.10 of the contract provides: Contractor's management of defects

10.10 The contractor must regularly publish defects lists for all work required under the contract as a management tool for managing the subcontractors' obligations to rectify defects. 10.10.1 if the project director requests the contractor to do so, the contractor must promptly give the project director the then current list and any previous lists requested by the project director. 21 The plaintiff has kept its own list pursuant to its obligations to do so and from time to time has reported to the project director, the last time being on 1 March 2010. The defendant has refused to assist in a process of cross referencing the builder's project list with the defendant's list, and the project director will not have regard to the defendant's list. The basis of the plaintiff's claims 22 The plaintiff suggests that the clause 16.2 notice issued by the defendant is invalid and that there should be implied a negative stipulation in the contract not to call up the bond in such circumstances. The law on calling up performance bond is usefully set out by Austin J in Reed Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd (1999) 15 BCL 158: " 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 Gibbs J in the Wood Hall case (at 451) and recognised as well by Young J in Hortico (Australia) Pty Ltd v Energy Equipment Co (Australia) Pty Ltd (1986) 2 BCL 366, 370, is that the Court will enjoin the party in whose favour the bond has been given from acting fraudulently. The second exception, recently recognised by the Victorian Supreme Court in Olex Focas Pty Ltd v Skodaexport Co Ltd , [1997] ATPR (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. The possibility of such an exception to the general rule was acknowledged by Stephen J in the Wood Hall case at 459, but there was no relevant stipulation in the construction contract in that case. It was applied in this Court by Yeldham J in Pearson Bridge (NSW) Pty Ltd v State Rail Authority (NSW) (1982) 1 Aust Construction LR 81. It was also acknowledged by Rolfe J in the Barclay Mowlem case to which I have referred. These themes have been either noted or taken up in other cases: Tenore Pty Ltd v Roleystone Pty Ltd (unreported, NSW Sup Ct, Giles J, 14 September 1990); Hughes Bros Pty Ltd v Telede Pty Ltd (1989) 7 BCL 210; Road Surfaces Group Pty Ltd v Brown [1987] 2 Qd R 792; Selvas Pty Ltd v Hansen Yunchen (SA) Pty Ltd (1987) 6 Australian Construction LR 36; Pearson Bridge (NSW) Pty Ltd v State Rail Authority of NSW (1982) 1 Australian Construction LR 81; Sabemo Pty Ltd v Malaysia Hotel (Australia) Pty Ltd (unreported, NSW Sup Ct, Hodgson J, 5 July 1990); Transfield Pty Ltd v Fuller-FL Smidth (Pacific) Pty Ltd & Deutsch Bank AG (unreported, NSW Sup Ct, Bainton J, 9 May 1997). The question in the present circumstances is, therefore, whether there is an express or implied negative stipulation in the building contract by which the defendant as proprietor has promised not to call upon the bond in such circumstances as the present; and if there is, whether I ought to intervene to enforce or continue the enforcement of such a promise by interlocutory injunction. 23 Some other cases such as Rejan Constructions Pty Ltd v Manningham Medical Centre Pty Ltd [2002] VSC 579; (2003) 19 BCL 451 suggest that the ability to interfere is more limited and may even be limited to a clear case of fraud of which the surety is aware. Having regard to the nature of the application before me I will have regard to the law as referred to by Austin J and in the authorities to which he refers as being an arguable basis for the application. 24 The plaintiff's case initially in submissions was that the notice was invalid for the following reasons: 1. The defendant has no contractual entitlement to issue instructions in respect of defects because only the project director may do so; 2. the defects do not amount to a material non compliance within clause 16.2; 3. the notice does not adequately identity the breach; 4. the notice does not state what the defendant requires the contractor to do to rectify the defects; 5. the notice does not provide a reasonable time to remedy the defects; 6. it is an attempt to interfere with the contractual position as to rectification of defects which is reserved to the project director. 25 It was also then suggested that: a. it is unconscionable conduct to argue in court about disputed defects and at the same time seek to exercise rights under clause 16; and b. it is unconscionable conduct to subject the builder to a barrage of different lists with different consequences. 26 On the second day, these matters were refined into the following series of matters that were said to be serious questions to be determined: 1. Is the existence of defects a material non-compliance with the contractor's obligations under the contract? [Note: one of the contractor's main obligations is to rectify defects under clause 2.1.2] 2. Is service of the defendant's Defects List (as Schedule "A" of the cross claim) notification to the contractor of defects requiring rectification under the contract (under Clause 10.15 or otherwise)? 3. Does the clause 16.2 notice comply with the requirements of the contract in: a) describing the alleged breach; b) the provision of a specific reasonable time?

If not all the defects set forth in the defendant's "Defects Program" were notified to the plaintiff before the service of the clause 16.2 notice on 19 July 2010: a) was the notice invalid? b) could Lucas Stuart have been in breach for non-rectification of those defects first notified? 5. If the plaintiff is performing its obligations under clause 2.1.2 and rectifying defects in accordance with the contract, is there any breach entitling the principal to call up the performance undertaking?

Is the principal entitled to issue separate and different defect rectification notices upon the contractor (one through its agent and one directly) in light of clauses 18.10 and clause 18.18? 7. Is the issuance of separate and different defect rectification notices by the principal unconscionable conduct under s 51 AA of the Trade Practice Act ? 27 It is perhaps convenient to discuss the various ways in which it is put under the following headings: 1. Whether the existence of defects can be a material non compliance within clause 16. 2. Whether the procedure in clause 16.2 cannot apply to breaches relating to defects because the regime in clause 10.15 is the sole mechanism for resolving disputes as to defects. 3. Did the notice comply with the formal requirements of clause 16.2? 4. Is the clause 16.2 notice inconsistent with the directions of the project director? 5. Is the clause 16.2 notice inconsistent with the dispute resolution procedure? 6. Are the procedures which the plaintiff has adopted unconscionable conduct within s 51AA of the Trade Practices Act 1974? The alleged defects do not amount to material non compliance with the plaintiff's obligations under the contract 28 This is put forward as a reason why the notice is invalid. The plaintiff's submissions on this aspect were as follows: "35 Before a notice can be issued pursuant to clause 16.2, Lucas must have failed to "materially comply" with its obligations under the Contract. 36 Such an assertion is inconsistent with the fact that on 16 July 2010 (3 days before the Notice was issued), the Project Director issued a certificate of practical completion for separate parts 2 and 3, being the balance of the Project (Davis tabs 5 and 6). Lucas contends that practical completion had been achieved much earlier in November 2008; however, in any event, by no later than 16 July 2010, the Project Director was satisfied that practical completion of all separate parts had been achieved (Davis tabs 4 and 5). 37 The Contract defines practical completion as, inter alia: 10.13 Subject to clause 10.14, any separate part will only be practically complete when it is complete in accordance with this clause and the contract documents and may be lawfully occupied by the principal or any person authorised by the principal, without being inconvenienced by the rectification of minor defects… 38 By issuing the certificates of practical completion for separate parts 1, 2 and 3, the Project Director has accepted that the works have been completed in accordance with the Contract, apart from the rectification of minor defects. 39 It follows that Lucas cannot have failed to materially comply with its obligations under the Contract in respect of the alleged defects." 29 The relevant part of clause 16.2 is "has not materially complied with its obligations under the contract". 30 This is not talking in the language of the failure of substantial performance, which would entitle a party to terminate the contract for breach at common law. The words are, however, also used in the contractual right to terminate in clause 17. The words used in clause 16 have to been seen in the light of clause 2 of the contract. That clause is in these terms: " 2 Main obligations Contractor's main obligations 2.1 The contractor must construct the project in strict accordance with the requirements of the contract documents by the date for practical completion. 2.1.1 The contractor must also design the excavation and permanent shoring of the site consistently with the design for the rest of the project produced by the principal's consultants. 2.1.2 It must also rectify, in accordance with the contract, all defect." 31 It is also at this stage useful to note the terms of clause 10.1: 10 Building Work

Construction in accordance with contract documents & standards 10.1 The contractor must construct the project in strict accordance with the contract documents stated in schedule 2, including this document and the design document produced by the contractor under part 9. 10.1.1 In doing so, unless the contract documents require a higher standard or quality, the contractor must also comply with all applicable industry and general standards of workmanship, method, testing and conduct 32 In the general interpretation clause 18, there is no restriction on using the headings to the various clauses in the contract in construing the contract. 33 The inclusion of rectification of defects as one of the main obligations under the contract is a strong pointer to that been included in the obligations upon which clause 16.2 can fasten. 34 It also should be noted that in ordinary parlance a defect in work does constitute a breach of contract: see Honeywood v Munnings (2006) 67 NSWLR 466 at 17 and Tameside Metropolitan Borough Council v Barlow Securities Group Services Ltd (2001) EWCA Civ 1, (2001) BLR 113 at [44] -[45]. Considering this it should be appreciated that the notice refers to two different breaches. One is the actual construction of works containing defects and the second breach is the failure to rectify. Both of the breaches are comprehended within the terms of clause 2 of the contract as main obligations of the parties. 35 Importantly, clause 2.1 has its own time limit, namely, the dates for practical completion. On its face this time limit conditions the obligations to construct without defects. Given the use in clause 2.1.2 of the words "in accordance with the contract" the obligation to rectify a defect that has accrued is conditioned in respect of time by other provisions of the contract. 36 On the question of the arguable construction of clause 16.2 I do not see that clause 10.13 with its reference to minor defects assists the plaintiff. Clause 16.2 applied both before and after practical completion. One can assume that the word "material" has some significance in its application to obligations under the contract. Whether it is one of the Shorter Oxford definitions of the word "material" such as "of much consequence", "genuine" or "essential" does not have to be determined because in my view the elevation of "rectification of defects" into the category of main obligations puts it beyond argument that defects are within clause 16.2. 37 It should be noted that there was evidence before me that the defects in the clause 16.2 notice posed substantial risks, are costly to repair and do require prompt rectification. The procedure in clause 16.2 cannot apply to a breach relating to defects, as the sole mechanism is clause 10.5 of the contract. 38 The plaintiff submitted that clause 10.15 of the contract provides a regime for the notification of defects by the project director, the defendant has no entitlement to issue a notice in respect of defects, and that power is expressly reserved for the project director. 39 In the plaintiff's submissions reference was also made to its "contractual entitlement" to rectify defects within the defects liability period of 12 months. In considering this alleged right and the plaintiff's principle submission it is appropriate to note the provisions in the contract for defects and their rectification. I have earlier referred to clause 10.10, which imposes a liability on the builder to maintain a list of defects as a management tool for managing its subcontractors. The clause dealing with defects is in fairly usual terms and is as follows: Defects liability period

10.15 At anytime prior to the last date of final completion, the contractor must rectify defects in the work required by the contract, including any defect that is notified to the contractor in writing by the project director. The project director's notice may state each of the following: The defect that requires rectification, The time by which the rectification work must be commenced. The time by which the defect must be rectified. Any conditions, or restrictions, on access to the part of the works in which the defect is located.

10.15.1 If notified of a defect, the contractor must rectify the defect in accordance with the project director's instructions in the notice and in accordance with the contract documents. 10.15.2 The defects liability period is a period expiring 12 months after he last date of practical completion, but may be extended in accordance with this clause.

10.15.3 If a defect, notified to the contractor during the defects liability period, has not been rectified in accordance with the project director's instructions, the defect liability period will be extended to the date on which the defect is rectified.

10.15.4 If a defect, notified to the contractor during the defects liability period, has not been rectified in accordance with the project director's instructions, the principal may engage other contractors to rectify the defect. The reasonable cost of rectifying a defect under this clause will be payable by the contractor. Any money payable by the contractor to the principal under this clause may be deducted from money payable by the principal to the contractor, including from money certified as payable to the contractor under part 13.

10.15.5 The project director may declare a special liability period in respect of any particular rectification work. In that case the separate defect liability period will start on the date the particular rectification work is completed and will expire on the later of the following: A date 12 months after the date or any shorter period specified by the project director. The date on which all defects in the rectification work, notified to the contractor by the project director during the special defects liability period, have been rectified in accordance with the contract documents.

10.15.16 The contractor acknowledges that access to the site for the rectification of defects after the date of practical completion will be restricted because the project will then be operated as an entertainment and lifestyle facility that will be open to the public for extended hours and, therefore, the contractor will have to rectify defects without disrupting the operations." 40 It must be observed that from a practical point of view, the use of defects liability provisions in contracts is usually to provide an additional period of further protection in case defects emerge after the building has been completed and occupied. Experience suggests that this is a wise provision. 41 Hudson Building and Engineering Contracts, 11th ed, Vol 1, discusses the nature of these provisions in these terms: "In the absence of express provision, the remedies under these clauses are in addition to and not in substitution for the common law rights, and even where the defects have appeared within the period the owner may sue for damages rather than call on the contractor to do the work…" 42 This right to sue for damages is but one of the rights available to the proprietor. On its face clause 10.15 does not exclude any common law remedy and it gives the proprietors the following additional rights. a. A right for the project director to give notice of a defect (clause 10.15); and b. A remedy that if there is non compliance with the notice then the reasonable cost of rectification becomes due from the plaintiff to the defendant as a debt (clause 10.15.4). 43 It also obviously allows notice to be given of a defect which only becomes apparent after practical completion. I note that in the commencing words of clause 10.15 the word "including" appears and perhaps all that can be drawn from the use of that word is that the clause recognises the earlier obligation in clause 2.1.2 of the contract to rectify defects. 44 In deciding whether clause 10.15 covers the field in respect of defects it is important to note the different purpose of clause 10.15 and clause 16. As its heading explains clause 16 deals with cashing security and payment of retention. It has a limited period of operation as once practical and final completion are achieved the securities are returned and there is nothing for clause 16.2 to operate upon. 45 The words in clause 16.2 encompass breaches of many different types. They only have to be material. There may be breaches to which the clause extends that have nothing to do with defects or faulty workmanship. 46 Clause 10.15 on the other hand is very limited in that it only applies to defects. I cannot see any argument on the face of the provisions that would suggest that the plaintiff suggested construction is possible. 47 The plaintiff however points to what is said to be the illogicalities arising from the separate regimes given under the defects liability provisions and the provisions in clause 16 suggesting in effect that the plaintiff is faced with inconsistent directions as to when work should be done if the clause 16 notice refers to defects. 48 Clauses 3.4 and 3.5 of the contract are as follows: Project director as decision maker 3.4 The project director will act as decision maker in relation to the parties' rights under the contract in relation to each of the following: 3.4.1 Determining reductions to the contract sum under part 4. 3.4.2 Certifying progress payments under part 13. 3.4.3 Determine claims under part 14. Project director as agent of the principal 3.5 The project director acts as the agent of the principal in relation to matters not mentioned in the preceding clause. When acting as the agent of the principal, the project director will act in the interests of the principal. 3.5.1 The contractor must comply with instructions from the project director. 49 It is clear that under the contract as a result of clause 3.5 that when acting in issuing defect notices pursuant to clause 10.15 the project director is acting as the agent of the proprietor. 50 When clause 16.2 notice deals with defects as in this case there is an apparent inconsistency as to when the work, if it appears in both notices, has to be done. It is clear that the clause 16.2 notice does not purport to be a notice under clause 10.15 with the different consequences which flows under that clause. 51 Given the different consequences I do not see an inconsistency. I address the practical effects later in this judgment.

Compliance with the formal requirements of the notice 52 The plaintiff's initial submissions suggest that none of the requirements were complied with. In the supplementary formulation the matters raised are whether there is a proper description of the breach and whether there was a provision of reasonable time to remedy the defects. 53 In their submissions the plaintiff gives the following examples of failure to identify the breach.

(i) Item TLAGEN3 is described as "no inspection risers to planters 330". The plaintiff is not aware of any requirement for inspection risers, and no detail has been specified in the defect schedule.

(ii) Item 893.14 is described as "strip lighting to stair missing", however no location is specified. The plaintiff has been unable to locate this alleged defect. 54 In Re Stewardson Stubbs and Collett Pty Ltd v Bankstown Municipal Council (1965) NSWLR 1671 the court was concerned with a contract which required the relevant notice "specify the default". Moffit J at 1675 commented on this provision as follows: "A default can be specified in two ways; one is by directing attention to the provision in the contract in respect of which default is made. The other is by giving particulars of the manner in which a breach has occurred. In order to specify the default I think at least the former must be pointed out. But each case will depend on its own circumstances as to whether in order to specify the default there must be added some particulars such as will identify the particular breach alleged." 55 The defendant also referred to Hounslow London Borough Council v Twickenham Garden Developments Ltd (1971) 1 Ch 233 at 265, "to suggest that the level of detail need only direct the contractor's mind to what is said to be amiss". In FPM Constructions Pty Ltd v Council of the City of Blue Mountains [2005] NSWCA 340, the Court of Appeal approved that statement and said at [151] the following: "151 It follows that a contractual notice should be read with the understanding which will be brought to the exercise by the recipient, including his or her knowledge of the circumstances in which it is given. If the recipient is a builder, it should not be assumed that the reader will understand technical legal terms, but it may be assumed that expressions commonly adopted in that industry will be understood. However, each case will turn upon its own particular circumstances, including the identity of the contracting parties. In the same way, the notice need not be construed as a contract, eschewing reference to any material not identified on the printed page. That does not mean that the builder should be left to guess at the provision said to have been breached, nor as to the particular conduct said to be in breach, if that has not been specified and if there is doubt as to its identity. Further, in considering whether a particular notice is adequate to identify a particular breach, a court may take into account the response of the builder. That is not, of course, to say that the builder can demonstrate inadequacy by simply claiming that no response can properly be given; however, where an appropriate response is provided, the adequacy of the notice may be difficult to dispute." 56 Returning to the notice, the nature of the contractual provisions that have been breached have been set out by reference to the paragraphs in the contract. In respect of the first breach the relevant clauses have been specified. Those clauses specify a time for compliance, which was passed when the notice was issued. The second breach namely the failure to rectify the defects correctly refers to the clauses referring to an obligation to rectify. However under the terms of clause 10.15 the rectification must be carried out prior to final completion or as specified in the project director's notice. In each case it is presently 30 June 2011. Thus time had not passed at the time of the issue of the clause 16.2 notice so arguably there would be no breach in respect of the failure to rectify. Thus the drawing of attention to the particular items of work assumes more importance. 57 So far as drawing attention to the particular items of work are concerned, the table attached to the notice identifies the location of the problem and then contains two columns headed "General Remarks" and "Defect Description". A general perusal of them indicates what one would imagine would be sufficient to draw the contractor's attention to the problem concerned. From the first example quoted the claim that there is no requirement for inspection risers suggests that that the contractor would wish to dispute the contractual basis for this requirement. One can thus assume there might be a dispute about it. As to the second item, it is true that there is no location specified in the schedule. 58 So far as the time allowed, there is only two months allowed after a week for establishment. Evidence has been given that this should be adequate. The only suggestion in the evidence of any problem that would impact upon this, seems to be the question of re-cuttings some travertine benches. The evidence sought to be led by the plaintiff of the lead-time was rejected and accordingly the only evidence available suggests that this may take four weeks to cut. This no doubt can be accommodated in the program and one would have thought that since this defect had been notified in 2009 that it may have been put in hand. 59 It is to be noted that there are 154 defects in the clause 16.2 notice for which 2 months is allowed compared with the 1521 defects in the project directors notice for which 12 months was allowed. Naturally the 154 probably contain the more serious of the defects. 60 Having regard to the evidence, there is plainly no arguable case that the time given in the notice is not appropriate. 61 Another point in respect of the breach that is necessary to support a notice under clause 16 is that the actual breach alleged in the notice does not have to be established as for a notice to be valid there need only be a bone fide claim by the proprietor that the builder has not materially complied with its obligations under the contract. 62 In support of this construction of clause 16.2, the defendant relies on Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd (No 3) [2007] FCA 2082 in which Gilmour J held: "[39] If it were the case that, on its proper construction, ONGC could not call on the guarantees until there was an admitted or established breach of contract, the time at which an arbitral tribunal or court might determine that matter could well be after the performance guarantees had expired: cf Ideas Plus Investments at [39] per Steytler P. Such a construction does not, in my view, make commercial common sense: McCann v Switzerland Insurance Australia Limited (2000) 203 CLR 579 at [22] and [23] per Gleeson CJ.

[40] The performance guarantees secured the Contractor's 12 month warranty under the Contract. Assume a major defect was discovered by ONGC late in the Warranty period, say only one month prior to expiry of the performance guarantees, but was not acknowledged by Clough as resulting from any failure by it to honour its commitments under the Construction Contract. On Clough's construction, it would not be open to ONGC to call on the performance guarantees until a Court or Tribunal had found a breach of contract. However, it is most unlikely that any such issue could be determined, especially in the context of a complex construction project, within a one month time frame. By the time it had been determined, in ONGC's favour, the guarantees would have expired, and the intended contractual security would be lost.

[41] I consider that a commercial object of the requirement for performance guarantees under the Construction Contract is to allocate the risk of a party being out of pocket pending the resolution of any dispute and that ONGC was entitled to call upon the guarantees even where a genuine dispute existed, as to whether or not Clough was in breach and whether or not damages had been suffered: Fletcher Construction v Varsdorf at p 821 per Charles JA and at p 826 per Callaway JA. That case concerned irrevocable standby letters of credit. Nonetheless it is of assistance, in principle, in approaching the construction of the performance guarantees, which informs the construction of cl 3.3 as a whole and, for present purposes, cl 3.3.3 in particular." [42] Clough was required by cl 3.3.1 to furnish to ONGC within two weeks of signing the Construction Contract an "unconditional and irrevocable" performance bank guarantee for the due performance of the contract in terms of a proforma guarantee set out in an appendix to the Construction Contract. This lends force to ONGC's construction: Fletcher Construction v Varsdorf at p 822 per Charles JA. In that passage his Honour cited Hudson on Building and Engineering Contracts (para 17,075) which asserts that: Insofar as a construction contract may make clear provision for the furnishing of an unconditional guarantee as security for due performance, the normal interpretation, ... will be that, in response to the stipulated demand, an unqualified transfer of the sums in question is intended, provided only that there is a bona fide dispute or claim on the secured party's part, and that any further investigation of its merits or extent is not usually intended by the contract. 63 This decision was upheld by the Full Court on appeal in Clough Engineering Limited v Oil and Natural Gas Corporation Limited (2008) 249 ALR 458, [2008] FCAFC 136. 64 In the general interpretation clause of the contract the following appears: "The parties intend to achieve the commercial objectives expressed in this contract. If any provision is ambiguous or unclear, that provision must be interpreted in a way that best serves the commercial objectives of this contract."

This reinforces the adoption of the construction referred to in Clough Engineering although in my view there is no ambiguity or uncertainty. 65 Having regard to the evidence before me plainly there is a genuine claim as to the existence of the defects that the plaintiff has been attempting to fix since early 2009 without complete success.

Clause 16 notices are inconsistent with the direction given by the project director 66 The plaintiff's submissions on this aspect are as follows: "Further, Hemmes is acting inconsistently with the instructions given by the Project Director.

On 22 July 2010 Mr Pat Gocher (on behalf of the Project Director) wrote to Lucas advising that he was not aware of the Hemmes Defect Program, and that the Project Director did not agree to reconciling those items with either the Project Director's List or Lucas' List (Davis tab I). The Project Director did agree to reconcile its list with the Lucas Master List, but to date this has not occurred.

The Project Director has repeatedly advised Lucas that it is not authorised to discuss the Hemmes Defect List (Davis paragraphs 41 and 42; tab J).

Further, the approach taken by Hemmes is contrary to the process agreed upon between Lucas and the Project Director.

On 6 September 2010, Lucas and the Project Director agreed to a new system for dealing with defects (Davis tab N). That involves regular meetings between the Project Director and Lucas. While the Project Director noted (without providing any particulars) that it did not agree with Lucas' assessment of the current defects, it advised that "we'll work through this in the process outlined above".

The Project Director also agreed to update the defects control document." 67 There can be no doubt that there are two separate lists. However, as I have indicated, they are not two separate defect procedures. They are in fact one procedure under clause 10.15 of the contract and another separate procedure for a different purpose under clause 16. Accordingly they are required to be treated by the contractor separately. Given this situation I do not see that there is any inconsistency. The clause 16 notice is inconsistent with the dispute resolution procedure. 68 The builder has given notice of the dispute under clause 15.1 of the contract in respect of inter alia the project director's list of defects. Normal resolution of that is for the appointment of an expert to determine the dispute in the absence of the parties being able to resolve it. The parties have agreed that the dispute referred to in that notice will be dealt with as part of the substantive proceedings before the court on the cross claim. 69 The plaintiff's submissions in respect of this are that if the defendant were able to exercise any of the powers set out in clauses 10.15 and 10.22 of the contract concurrently with the project director, which is denied, this could result in a situation under which the plaintiff could dispute the decision of the project director but not that of the defendant. It would also lead to a situation where the plaintiff had inconsistent directions in respect of the project. 70 The plaintiff also submitted that in circumstances where the defendant has agreed that the disputed defects will be dealt with as part of these proceedings, it would be unconscionable for the defendant to exercise any purported rights pursuant to the notice. 71 Leaving aside questions of whether or not a direction under clause 10.15 is a decision within the dispute resolution procedure, a question that may well be answered in the negative, the plaintiff's submissions do not address the separate nature of the two processes to which I have referred earlier. It is a contractual regime to which the plaintiff agreed. 72 So far as unconscionability is concerned, it should be realised that the clause 16.2 procedure, if the plaintiff fails to comply with the notice, will only have the consequence of the transfer of cash pursuant to the undertaking. It will not determine the parties' final rights with respect to the contract which can still be litigated and which will be a matter for the court at the final hearing. Are the procedures which the plaintiff has adopted unconscionable conduct within s 51AA of the Trade Practices Act? 73 I have already drawn attention to the fact that there are 154 defects in the clause 16.2 notice for which 2 months is allowed compared with the 1521 defects in the project directors notice for which 12 months was allowed and that the 154 probably contain the more serious of the defects. 74 There is no suggestion in the project director's notification under 10.15 of any order in which the rectification is to take place. Thus the plaintiff can concentrate his efforts on those defects that fall within the clause 16.2 notice in the first instance. There was reference in the evidence to the plaintiff's own list of defects kept under clause 10.10 and the list which has founded the defendants cross claim. Those however have no practical contractual significance at the present time. In particular the list for the cross claim is not a defects list issued under clause 10.15. The plaintiff only has two lists to deal with and on the evidence before me adequate time to complete the rectification of the defects in the clause 16.2 list. There is no suggestion in the evidence that the defects in the project directors list can not be completed in 12 months. In these circumstances I do not see that there is any arguable case for unconscionable conduct. 75 I am not satisfied that there is a serious question to be tried in respect of the clause 16.2 notice and I decline to give interlocutory relief. 76 I dismiss the motion filed 13 September 2010 with costs.

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Trade Practices Act 1974(Cth)

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Judgment (42 paragraphs)

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