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[2018] VSC 92
Supreme Court of Victoria
2018-03-02
RIORDAN J
Original judgment source is linked above.
CONTRACT - Specific performance - Building and construction contract - Contract required the contractor to provide two unconditional bank guarantees of an approved type - Where guarantees with expiry dates provided - No express approval - Whether approval can be inferred from conduct - Guarantees 'approved' by conduct within the meaning of the contract - Proceeding dismissed.
1 By amendment to the originating process filed 4 October 2017 (pursuant to leave granted on 17 January 2018) the plaintiff ('PHHH') seeks an injunction or order that the first defendant ('United Commercial Projects') provide it with two unconditional bank guarantees in accordance with the terms of, and in the form approved by Schedule 5 of, the construction contract ('the Contract') between the parties entered into on 16 March 2016.
2 PHHH is the owner of a commercial building at 282-284 Victoria Street, Brunswick, which is the site of a kindergarten and childcare centre.
3 United Commercial Projects is a construction company that performs domestic and commercial construction work in Melbourne.
4 On or about 16 March 2016, PHHH and United Commercial Projects entered into the Contract under which United Commercial Projects agreed to perform certain alterations and additions to the building. The Contract relevantly included the following provisions with respect to security for performance:
(a) have in place the security by unconditional guarantee in accordance with clause C1.
a. allow the owner to withhold a cash retention sum or
b. provide the owner with the unconditional guarantees
according to the alternative required by item 7B of schedule 1 [being unconditional guarantees].
...
(Clause C1)
(d) Security to owner by unconditional guarantees
(e) Owner's release of security on practical completion
5 Under the Contract, the balance of the amount of security is not required to be released until at least the expiration of the 12 months after the date for practical completion,[1] because of the interaction of the following:
(a) The balance of the amount of security is to be released after the issue of the final certificate by the architect in response to the final claim by the contractor pursuant to clause C7.
(b) A final claim cannot be made, and therefore a final certificate is not required to be issued, until the requirements of clause N10 of the contract have been met, including the expiration of the 12 months' defects liability period, the completion of the works and the rectification of all defects.
(c) Clause M13 with item 25 of schedule 1 of the contract provides for a defects liability period of 12 months from the date of practical completion.
6 At a site meeting on 8 June 2016, the architect formally requested that United Commercial Projects issue a bank guarantee in accordance with the Contract.
7 By email of 28 July 2016 to Mr Palmer of United Commercial Projects - Mr Honeyborne of PHHH stated:
Can you please email a copy of the bank guarantee to me. The bank and the QS are looking for a copy. I will tell you where the original need [sic] to be posted to, if at all.
8 By email of 29 July 2016 to Mr Palmer and Mr Honeyborne - Mr Lian of Insite Architects attached two bank guarantees and stated:
If you require anything else, please do not hesitate to contact us from Insite.
The attached bank guarantees were each for $87,128.75, and named the favouree as 'Patrick Honeyborne as trustee for the PHHH Investment No 2 Trust ABN 26 934 033 859'. Each guarantee provided that it continued until one of a number of events occurred, including 'the arrival of the Expiry Date', which was:
(a) in the case of the first guarantee, 28 February 2017; and
(b) in the case of the second guarantee, 28 February 2018.
9 By email of 8 August 2016 at 11:15 am to Insite Architects - Mr Honeyborne notes that the bank guarantees are made out to him as trustee and instead should be made out to 'PHHH Investments No 2 Pty Ltd as trustee for PHHH Investments No 2 Trust' ('the amended name').
10 By email of 8 August 2016 at 12:31 pm to Mr Rossi at United Commercial Projects and Mr Honeyborne (copied to Mr Tan of Bankwest and Mr Vella of BC Partners) - Mr Cohen of Bankwest requests, as recommended by Mr Honeyborne, that the bank guarantee be provided in the amended name.
11 By email of 8 August 2016 at 2:53 pm to Bankwest, Mr Honeyborne, BC Partners and Mr Soliman of United Commercial Projects - Mr Rossi of United Commercial Projects states that United Commercial Projects' bank has
issued a bank guarantee in accordance with the agreed contract and will not deviate from the owner title contained within.
12 By email of 8 August 2016 at 3:57 pm to Mr Rossi of United Commercial Projects - Mr Honeyborne points out that the first page of the contract states that the owner is 'PHHH Investments No 2 Pty Ltd'.
13 By email of 9 August 2016 at 8:30 am to Mr Honeyborne - Mr Rossi of United Commercial Projects states that the bank guarantees
are issued to "PHHH Investments No 2 Pty Ltd" as per the contract and cannot be issued to "PHHH Investments No 2 Pty Ltd atft PHHH Investments No 2 Trust" as per the request.
14 By email dated 9 August 2016 at 4:51 pm to Mr Rossi - Mr Honeyborne points out that the bank guarantee is issued to 'Patrick Honeyborne ATF PHHH Investments No 2 Trust'.
15 The confusion then appears to be resolved because on 18 August 2016 two revised bank guarantees were issued in the amended name. The revised guarantees were otherwise identical to the original guarantees, including the provision for expiry dates.
16 By email of 19 August 2016 at 4:58 pm to Mr Honeyborne - Insite Architects attached the revised bank guarantees and stated:
Please find attached revised Bank Guarantees for your information. Please issue to the bank to arrange payment for the outstanding progress claim.
17 After provision of the revised bank guarantees, United Commercial Projects' outstanding progress claim was paid.
18 On 28 February 2017, the first guarantee expired.
19 On 21 July 2017, the works reached practical completion.
20 On 28 February 2018, the second guarantee expired.
21 The defects liability period will expire not before 21 July 2018.
22 By letter dated 8 September 2017 to United Commercial Projects' solicitors - the solicitors for PHHH asserted that the revised guarantees were not unconditional because of the inclusion of the expiration dates and, in their place, required the provision of '2 unconditional guarantees'.
23 It was submitted by Mr Phillpott on behalf of PHHH as follows:
(a) The revised guarantees were not in the deemed to be approved form in schedule 5. The guarantees were otherwise required by clause C3 to be approved by PHHH; and PHHH had not approved the revised guarantees.
(b) United Commercial Projects' estoppel claim failed because:
(ii) United Commercial Projects did not rely on any representation; and
(c) PHHH should not be denied relief on discretionary grounds because it had a cross-claim for an amount in excess of the judgment debt, the failure to return the first guarantee was inconsequential; and the delay in complaining was explicable by reason of Mr Honeyborne's lack of awareness.
24 Counsel for PHHH referred to the decision of the Queensland Court of Appeal in Rakaia v Body Corporate for 'Inn Cairns' Community Titles Scheme 16010,[2] The relevant facts were as follows:
(a) A lot owner, in a community title scheme, proposed to apply for a development approval for material change of use of its Lot 36 from holiday accommodation to a multiple dwelling unit.
(b) Because the proposed change would affect the associated car park, which was on common property, the Council required evidence of the consent of the respondent Body Corporate, as the owner of the common property.
(c) The committee of the respondent Body Corporate passed a resolution approving the making of an application to convert the lot as applied for, insofar as it related to the car park on common property.
(d) A member of the committee of the Body Corporate affixed the common seal of the respondent Body Corporate and signed the form evidencing approval; and it was provided to the council.
(e) The council subsequently approved the development application.
25 The appellant, also a lot owner in the community title scheme, challenged the respondent Body Corporate's resolution on the basis (among others) that the committee's resolution had not authorised the attaching of the common seal to the form. Gotterson J rejected this contention and accepted the respondent's submission that 'approval' of the application 'involve[d] a decision to take the necessary steps to manifest that approval... Indeed, one of the definitions of "approve" in the Macquarie Dictionary is "to confirm or sanction officially"'.[3]
(a) Rakaia was not dealing with the circumstances in which approval could be inferred. The fact that the Body Corporate had approved the resolution was not in dispute. The question was whether the approval impliedly authorised the acts necessary to manifest the approval.
(b) Rakaia does not suggest that a party's approval must be determined by a subjective enquiry. This proposition is contrary to the objective theory of contract.[6]
(c) The word 'approve' is a common English word. It is not limited to official sanctioning; and neither do other definitions of 'approve',[7] nor Rakaia, require an approval to be 'official'.
27 Mr Andreou submitted on behalf of United Commercial Projects as follows:
(a) The revised bank guarantees satisfied the obligation imposed on United Commercial Projects by clause C1.1, and the insertion of the expiry date did not render them not 'unconditional'.
(b) The expiry dates provided for the bank guarantees to be in force until the times, as prescribed in the contract, for practical completion and the expiration of the defects liability period. These were the relevant times as at the date of entry into the contract.
(c) It was conceded that the guarantees were required, by clause C3.2, to be approved by PHHH. However, the revised bank guarantees were impliedly approved in the circumstances and, in particular, the request for revision and the absence of complaint after provision of the revised guarantees.
(d) PHHH should be denied relief on discretionary grounds because of its acquiescence, the failure to pay the judgment debt and the failure to return the first guarantee.
Although Mr Andreou did not abandon the estoppel claim, when asked to specifically identify his client's detriment, he was unable to do so.
28 It is common ground that clause C3.2 obliged United Commercial Projects to provide guarantees in the form of schedule 5 or otherwise as approved by PHHH. It may well be that a building owner would not be entitled to unreasonably withhold consent to a type of guarantee other than that provided in schedule 5, but that issue does not arise for determination in this case. It is also common ground that the revised guarantees were not in the form of schedule 5. Accordingly, the issue for determination is whether PHHH's approval of the revised guarantees can be inferred from PHHH's conduct in the circumstances.
29 The parties were unable to provide any authority on the meaning of 'approval' in relevantly similar contractual circumstances, so a useful analogue is the approach of the courts to acceptance of offers in formation of contracts; and the acceptance of terms.
30 The question of whether PHHH, by its conduct, approved the revised guarantees must be assessed objectively. As the High Court observed in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd, in the context of contractual rights and obligations:
The legal rights and obligations of the parties turn upon what their words and conduct would be reasonably understood to convey, not upon actual beliefs or intentions.[8]
31 In Brogden v Metropolitan Railway Co,[9] the House of Lords considered whether a party had accepted the terms of a contract in the following circumstances:
(a) The appellant supplied the respondent with coal for some years.
(b) The parties' agents met to formalise the terms of the supply agreement, after which the respondent drew terms of agreement and sent the document to the appellant.
(c) The appellant returned the document marked 'approved', signed and with some parts, which had been blank, filled in - such as the name of the arbitrator.
(d) The respondent received the document and did nothing further.
(e) Both parties for some time acted in accordance with the arrangements set out in the document.
32 The House of Lords found that the existence of the contract should be inferred from the conduct of the parties in the circumstances. Lord Blackburn explained:
[T]hough the parties may have gone no farther than an offer on the one side, saying, Here is the draft, ... and the draft so offered by the one side is approved by the other, everything being agreed to except the name of the arbitrator, which the one side has filled in and the other has not yet assented to, if both parties have acted upon that draft and treated it as binding, they will be bound by it. When they have come so near as I have said, still it remained to execute formal agreements, so that each side should be perfectly safe and secure, knowing that the other side was bound. But, although that was what each party contemplated, still I agree (I think the Lord Chief Justice Cockburn states it clearly enough), 'that if a draft having been prepared and agreed upon as the basis of a deed or contract to be executed between two parties, the parties, without waiting for the execution of the more formal instrument, proceed to act upon the draft, and treat it as binding upon them, both parties will be bound by it. But it must be clear that the parties have both waived the execution of the formal instrument and have agreed expressly, or as shown by their conduct, to act on the informal one'.[10]
33 In Empirnall Holdings Pty Ltd v Machon Paul Partners Pty Ltd ('Empirnall'),[11] the New South Wales Court of Appeal found that a property developer, who had not executed a written contract submitted by the managing architects, but who had been engaged in the substantial property development, was bound by its terms because the property developer's assent could be inferred from the whole of the circumstances of the dealings between the parties. McHugh JA (with whom Samuels JA agreed) identified the ultimate question as being
whether a reasonable bystander would regard the conduct of the offeree, including his silence, as signaling to the offeror that his offer has been accepted.[12]
34 The Brogden principle was applied by the Court of Appeal in PRA Electrical Pty Ltd v Perseverance Exploration Pty Ltd.[13] In response to an invitation, the appellant tendered, in the form of an offer, to perform certain works in accordance with the tender document. A special condition of the tender was that no contract would come into effect until full execution of an agreement to be prepared by the respondent. The respondent wrote accepting the tender following which there were site meetings, bank guarantees were provided; and the appellant was given possession of the site, commenced work and issued progress claims. When a dispute arose, the appellant asserted that the parties had not executed the formal agreement and therefore there was no contract. Ashley JA (with whom Maxwell P and Nettle JA agreed) considered that Brogden showed that:
where, subject to the preparation of an unexecuted document - which the parties intend should constitute a contract between them - those parties act consistently with its provisions, it may be concluded that they have entered into an informal or implied agreement in the terms of that document - and from a date identified by particular conduct.[14]
[T]he objective bystander, considering [the parties'] conduct, and being apprised of the contents of the documents identified by the 16 August letter ... would conclude that the parties had by intent entered into a binding and operative agreement notwithstanding that no conformed contract document had been prepared and executed; and that the terms of the agreement ... were to be found in the documents identified by the 16 August letter. So much, it would be concluded, was discernible from the conduct of each of the parties - whether it be the undertaking obligations or the reaping of benefits.[15]
36 In P'Auer AG v Polybuild Technologies International Pty Ltd,[16] Whelan JA (with whom Ferguson and Kaye JJA agreed) explained the circumstances in which the law will infer the existence of a contract in the absence of a clear offer and acceptance:
The relevant starting point in a case of this kind is the principle that a contractual obligation cannot be imposed by an offeror upon an offeree merely by reason of a failure to reject an offer made. Silence, in itself, cannot constitute acceptance.
Nevertheless, leaving to one side cases of estoppel, cases where there is an historic relevant course of dealing, and cases where the events are so obscure or so far in the past that direct evidence is not available, there are circumstances where acceptance of an offer can be inferred in the absence of express consent. This will be the case if an objective bystander would conclude from the offeree's conduct, including his silence, that the offeree has accepted the offer and has signalled that acceptance to the offeror.
Further, and more generally, it is now accepted that the existence of a contract can be established or inferred where a manifestation of mutual assent must be implied from the circumstances.
It is important to emphasise that the circumstances in which a contract will be inferred, otherwise than by the traditional analysis of offer and acceptance, will be rare. ...
In determining if an agreement has been made in this way regard must be had to the entirety of the relevant conduct. The precise point in time at which the agreement comes into existence may not be clear, and the relationship between the parties themselves may be dynamic in such a way that the terms of the agreement might be added to or superseded over time.
In this context the absence of non-essential terms, or a lack of agreement on non-essential terms, will not invalidate the existence or effective operation of a binding contract.[17]
37 The inference of the existence of a contract will require that the Court is satisfied that the conduct of the parties and the circumstances prove all of the essential elements of the contract.[18] In the current case, the existence of a contract is not in dispute. Rather it is necessary to determine whether it can be inferred, from the conduct of the parties in the circumstances, that PHHH did approve the revised guarantees.
38 In the absence of express consent, this will be inferred 'if an objective bystander would conclude from the offeree's conduct, including his silence, that the offeree has accepted the offer and has signaled that acceptance to the offeror'.[19] I do not consider this to be in substance different from the test stated by McHugh JA in Empirnall, [20] which the parties accepted as being the appropriate test.[21]
(a) United Commercial Projects proffered the form of the original guarantees to PHHH, with the expiry dates.
(b) PHHH rejected the guarantees specifically on the ground that the favouree was incorrectly identified, but made no reference to the expiry dates.
(c) United Commercial Projects then proffered the revised guarantees, in accordance with PHHH's request; and requested that PHHH 'arrange payment for the outstanding progress claim'.
(d) PHHH paid the outstanding progress claim as requested, which PHHH was entitled to withhold pursuant to clause N7 until United Commercial Projects complied with its obligations under clause C1 (ie, the provision of a bank guarantee approved by PHHH).
(e) United Commercial Projects and PHHH proceeded with construction, progress claims and progress payments for over 12 months before the solicitors for PHHH first complained that the revised guarantees were not in accordance with clause C1.
40 In my opinion, an objective bystander would conclude that PHHH had approved the revised guarantees and signalled that approval to United Commercial Projects for the following reasons:
(a) PHHH rejected the form of the original guarantees solely and specifically on the basis of the name of the favouree.
(b) On receipt of the revised guarantees, PHHH signalled its approval by paying the outstanding progress claim, which it was entitled to withhold until it had approved the guarantees.
(c) Both parties have proceeded with the contract for over 12 months without any issue being raised about the adequacy of the guarantees.
41 Again adopting the analogy with formation of contract, as the learned authors of Cheshire & Fifoot: Law of Contract state:
An offeree 'promises' to be bound by the terms of the offer by simply getting on with it. This is an important aspect of the law because it recognises what commercial people actually do.[22]
42 In my opinion, it would not reflect the practice of commercial persons to find that an objective bystander would not have concluded that PHHH had approved the revised guarantees either at the time that it paid the outstanding progress claim, in response to the request by the architects; or at a time thereafter as the project proceeded with progress claims and progress payments, which PHHH could have refused to pay if it did not approve of the revised guarantees.
43 Accordingly, I find that United Commercial Projects complied with its obligation under clause C. I propose to dismiss the proceeding.
[2] [2012] QCA 306 (Margaret McMurdo P and White and Gotterson JJA).
[3] Ibid [52] (with whom Margaret McMurdo P and White agreed).
[4] Transcript of proceeding, 85, line 26.
[5] Transcript of proceeding, 80, line 10.
[7] For example, 'to pronounce or consider good' in the Macquarie Dictionary and 'to assent to as good' Oxford Dictionary.
[8] [2004] HCA 55; (2004) 218 CLR 471, 483 [34] (Gleeson CJ, McHugh, Kirby, Hayne and Callinan JJ).
[9] (1877) 2 AC 666 (Lord Cairns LC, Lords Hatherley, Selborne, Blackburn and Gordon).
[11] (1988) 14 NSWLR 523 (Kirby P, Samuels and McHugh JJA).
[13] [2007] VSCA 310; (2007) 20 VR 487 (Maxwell P, Nettle and Ashley JJA).
[16] [2015] VSCA 42 (Whelan, Ferguson and Kaye JJA) (emphasis added).
[17] Ibid [8]-[14] (emphasis added) (citations omitted) cited with approval in White v Timbercorp Finance Pty Ltd (in liq) [2017] VSCA 361 [145] (Ferguson CJ, Santamaria and McLeish JJA).
[18] Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (1988) 5 BPR 97,326, 11,117 (McHugh JA).
[19] P'Auer AG v Polybuild Technologies International Pty Ltd [2015] VSCA 42 [9] (Whelan JA, with whom Ferguson and Kaye JJA agreed).
[20] Empirnall Holdings Pty Ltd v Machon Paul Partners Pty Ltd (1988) 14 NSWLR 523, 535.
[21] Transcript of proceeding, 85, line 15.
[22] Seddon, Bigwood and Ellinghaus, Cheshire and Fifoot: Law of Contract (LexisNexis Butterworths, 10th Australian ed, 2012) 118 [3.23].
PHHH Investments No 2 Pty Ltd
United Commercial Projects Pty Ltd
(2004) 218 CLR 471
(1988) 14 NSWLR 523
(2007) 20 VR 487