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[2016] QCA 214
Court of Appeal (Qld)
2016-08-26
Morrison and Philip McMurdo JJA and Applegarth, J, Separate reasons for judgment of each member of the Court, Philip McMurdo, JA and Applegarth J concurring as to the orders made
Original judgment source is linked above.
Source: Queensland Judgments (Supreme Court Library Queensland) (www.queenslandjudgments.com.au). Converted to plain text by ZoeLaw. Not the official version.
SUPREME COURT OF QUEENSLAND
CITATION: RCR O'Donnell Griffin Pty Ltd v Forge Group Power Pty Ltd (Receivers and Managers Appointed) (in liq) & Ors [2016] QCA 214
PARTIES: RCR O'DONNELL GRIFFIN PTY LTD ACN 003 905 093 (appellant) v FORGE GROUP POWER PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) ACN 103 678 324 (first respondent) MARK FRANCIS XAVIER MENTHA (second respondent) SCOTT DAVID HARRY LANGDON (third respondent)
FILE NO/S: Appeal No 9125 of 2015 / SC No 5173 of 2014
DIVISION: Court of Appeal
PROCEEDING: General Civil Appeal
ORIGINATING COURT: Supreme Court at Brisbane – [2015] QSC 186
DELIVERED ON: Orders delivered ex tempore 24 June 2016 / Reasons delivered 26 August 2016
DELIVERED AT: Brisbane
HEARING DATE: 10 May 2016
JUDGES: Morrison and Philip McMurdo JJA and Applegarth J / Separate reasons for judgment of each member of the Court, Philip McMurdo JA and Applegarth J concurring as to the orders made, Morrison JA dissenting
ORDERS: Delivered ex tempore on 24 June 2016:
CATCHWORDS: CONTRACTS – BUILDING, ENGINEERING AND RELATED CONTRACTS – THE CONTRACT – CONSTRUCTION OF PARTICULAR CONTRACTS – SECURITY AND RETENTION OF FUNDS – where the first respondent (“Forge”) contracted with a third party company to construct a power station – where Forge subcontracted with the appellant (“RCR”) to provide electrical work (“Subcontract”) – where pursuant to the Subcontract RCR provided two unconditional bank guarantees to which Forge could have recourse where it “remains unpaid after the time for payment” – where Forge became insolvent and the second and third respondent receivers and managers were appointed in February 2014 – where there was an outstanding progress payment from Forge to RCR of approximately $4.2 million – where on 22 April 2014 RCR, Forge and the third party entered a Deed of Novation (“Deed”) discharging the Subcontract but not affecting “any accrued rights, obligations, claims or liabilities” between RCR and Forge under the Subcontract before the novation date – where the Deed further provided that Forge was to return the bank guarantees or cause them to be cancelled or unenforceable except to the extent that Forge considered it may have a claim against RCR or Forge believed RCR would pursue a claim against it – where on 21 May 2014 the receivers informed RCR that Forge “has or may have an outstanding claim” – where on 3 June 2014 the receivers caused Forge to appoint a Superintendent pursuant to cl 20 of the Subcontract, who on the same day certified that RCR should pay Forge approximately $2.5 million in liquidated damages for delay – where the receivers subsequently informed RCR of their intention to make demand upon one of the bank guarantees to satisfy the liquidated damages certified – where RCR commenced proceedings in the Trial Division contending that because the Subcontract had been discharged the Superintendent’s appointment was invalid and, consequently, there was no accrued right to payment preserved by the Deed entitling Forge to call upon the guarantees – where RCR alternatively contended that Forge was precluded from having recourse to the guarantees by either a contractual or equitable set off of the debt due to RCR – where the learned primary judge found in favour of Forge – where RCR contends that the learned primary judge erred in his construction of the Subcontract and the effect of the Deed – whether on the correct construction of the Subcontract and Deed, Forge, since the date of novation, has been entitled to demand payment of the bank guarantees / Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (In liq) (1978) 141 CLR 335; [1978] HCA 45, cited / Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd (2008) 249 ALR 458; [2008] FCAFC 136, cited / Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812, cited / FPM Constructions Pty Ltd v Council of the City of Blue Mountains [2005] NSWCA 340, cited / Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd (2012) 28 BCL 226; [2010] NSWCA 283, cited / Malaysia Hotel (Aust) Pty Ltd v Sabemo Pty Ltd (1993) 11 BCL 50; [1993] NSWCA 306, cited / McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457; [1933] HCA 25, cited / Miwa Pty Ltd v Siantan Properties Pte Ltd [2011] NSWCA 297, cited / Peninsula Balmain Pty Ltd v Abigroup Contractors Pty Ltd (2002) 18 BCL 322; [2002] NSWCA 211, cited / RCR O'Donnell Griffin Pty Ltd v Forge Group Power Pty Ltd and Ors [2015] QSC 186, overruled / Redline Contracting Pty Ltd v MCC Mining (Western Australia) Pty Ltd [2011] FCA 1337, cited / Roadshow Entertainment v (ACN 053 006 269) Pty Ltd (1997) 42 NSWLR 462, cited / Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd (2015) 31 BCL 407; [2015] VSCA 98, cited / Westralian Farmers Ltd v Commonwealth Agricultural Service Engineers Ltd (1936) 54 CLR 361; [1936] HCA 6, cited / Wood Hall Ltd v Pipeline Authority (1979) 141 CLR 443; [1979] HCA 21, cited
COUNSEL: W Sofronoff QC, with D Kelly QC and J Sweeney, for the appellant / D Clothier QC, with A Stumer, for the respondents
SOLICITORS: Carter Newell Lawyers for the appellant / Norton Rose Fulbright for the respondents
MORRISON JA: The orders made on 24 June 2016 were to allow the appeal. The reasons for that conclusion were to be delivered subsequently.
I have come to a different conclusion from that of Philip McMurdo JA and Applegarth J on the ultimate question of the disposition of the appeal. I have had the advantage of reading the draft reasons prepared by Philip McMurdo JA, and thus can express my reasons in short form.
At paragraphs [55]-[67] of his reasons, Philip McMurdo JA has set out the relevant parts of the subcontract.
Appointment of the Superintendent and certification
As at the date of the Deed of Novation there was no appointed Superintendent, the previous appointee having resigned in February 2014. The receivers caused Forge to appoint a new Superintendent, Mr Austin. The appointment was effective from 14 March 2014, even though it was actually made later, on 3 June 2014.
Mr Austin considered RCR’s claim for extensions of time, and during May 2014 considered Forge’s claim for liquidated damages. The learned primary judge held that Mr Austin had performed his duty as Superintendent. That finding is not challenged.
Mr Austin certified that Forge’s claim for liquidated damages was $2,588,068.20. It was that certificate that was the basis of Forge’s claim to call on the guarantees.
Clause 3.1 of the Deed of Novation provided:
“With effect on and from the Novation Date, the parties agree that the Subcontract is discharged and the New Contract is created on the same terms and conditions as the Subcontract except that … [here followed some alterations to the terms]”
“On and from the Novation Date, [RCR] releases [Forge] from:
(a)any obligation under or in connection with the Subcontract to be performed on or after the Novation Date; and
(b)any action, Claim or demand against [Forge], under or in connection with the Subcontract, which arise or accrue after the Novation Date.”
“The novation and release under clause 3 do not prejudice any accrued rights, obligations, claims or liabilities arising under the Subcontract in connection with the performance of the Subcontract before the Novation Date which the Outgoing Party and the Consenting Party may have against each other.”
The novation was achieved by clause 3.1 and the release of Forge was achieved by clause 3.3. Both events are referred to in clause 4.1, in the phrase “The novation and release under clause 3”. By clause 4.1 the parties to the Deed agreed that neither event would prejudice accrued “rights, obligations, claims or liabilities” as long as they arose “under the Subcontract” and “in connection with the performance of the Subcontract before the Novation Date”.
The term “claim” in the Deed of Novation was defined very broadly:
“Claim means any allegation, debt, cause of action, liability, claim, proceeding, suit or demand of any nature howsoever arising and whether present or future, fixed or unascertained, actual or contingent, whether at law, in equity, under statute or otherwise.”
RCR’s right to be paid its progress claim of January 2014 was an accrued right within clause 4.1.
Forge’s claim to liquidated damages required the Superintendent to assess that claim and, if the conclusion was that the claim was justified, certify the amount of the liquidated damages under clause 34.7 of the subcontract. As the learned primary judge found, that assessment “[was] not inevitably a mere mathematical exercise based on the number of days of delay after the date for practical completion…”.1
I respectfully agree with the learned primary judge that a certificate under clause 34.7 was necessary to establish a liability to pay liquidated damages for delay, and sufficient of itself to create that liability. That did not occur until 3 June 2014, when Mr Austin so certified.
I also respectfully agree with Philip McMurdo JA that “[in] the events which had occurred before the Novation date, the timing of RCR’s performance of the Subcontract had been such that, absent extensions of time of the relevant dates for practical completion, a Superintendent (if any) would have then been able to certify for liquidated damages”.2
The learned primary judge held that, notwithstanding the Deed of Novation, Forge remained entitled to appoint a Superintendent who was able to certify for liquidated damages under clause 34.7.3 I respectfully agree.
The obligation to appoint a Superintendent was given by clause 20, in these terms:
“The Principal shall ensure that at all times there is a Superintendent, and that the Superintendent fulfils all aspects of the role and functions honestly and in accordance with the Contract.”
“In that context, “at all times” must include any period during which the Superintendent has a function to perform under the Subcontract. To that extent, the Subcontract required Forge to ensure that a Superintendent was in place.”
That obligation, and the corresponding right of Forge to appoint a Superintendent,5 were brought into existence the day the Subcontract came into effect, in 2012. Clause 20 never ceased to be effective up to and at the date of the novation. In my view that was an “accrued right” or an “accrued obligation” within the meaning of clause 4.1 of the Deed of Novation. RCR and Forge agreed that neither the novation, nor the release in clause 3.3 of the Deed of Novation, would prejudice that right or obligation.
I also respectfully agree with the learned primary judge’s conclusion, for the reasons he gave, that a certificate by the Superintendent under clause 34.7 is necessary to establish liability in RCR to pay liquidated damages for delay, and that such a certificate is sufficient to do so.6
Clause 3.1 of the Deed of Novation provided that “on and from the Novation Date, the parties agree that the Subcontract is discharged”. It may be assumed that without more such a clause would ordinarily be construed to mean that, from that date, neither party was required to, or could, perform any part of the discharged contract. However that clause is subject to clause 4.1 of Deed, which provided that the novation itself did not “prejudice any accrued rights, obligations, claims or liabilities arising under the Subcontract”, where they arose “in connection with the performance of the Subcontract” before the novation date.
The learned primary judge said, in respect of whether the novation affected Forge’s entitlement to have the Superintendent certify the liquidated damages claim:7
“[28]The notion that the Deed was to deny Forge the chance to obtain a cl 34.7 certification for liquidated damages payable because of RCR’s established delay in achieving practical completion lacks attraction.
[29]Moreover, Forge's liquidated damages claim arises from RCR’s “performance of the Subcontract before the Novation Date”, which is an indication that far from impacting adversely on Forge's right to appoint a Superintendent post-termination, the Deed of Novation preserved it.”
In my view, his Honour was merely referring to the presumed subjective intention of the parties, objectively ascertained, in respect of the effect of the novation. Where the only thing that remained, prior to the novation deed, for Forge’s claim for liquidated damages to proceed was a Superintendent’s certificate, and where there was an accrued right to appoint a Superintendent, the parties cannot have intended that Forge would lose its claim simply because the Superintendent could not certify the claim.
The conclusion that Forge had an accrued right to appoint a Superintendent meant the parties were in the same position as if there was a Superintendent already appointed at the time. In that circumstance could it said that the parties, in particular Forge, intended to prevent the Superintendent from taking the final step to perfect Forge’s claim. Especially is that so, when one recalls that the certificate is a pre-condition to RCR’s liability to pay.
Put another way, prior to the execution of the Deed of Novation: (i) Forge had the accrued obligation to appoint a Superintendent; (ii) RCR had the accrued right to that appointment; (iii) Forge had the accrued right to have the Superintendent certify its claim; and (iv) if that certification occurred RCR had an accrued liability to pay. Given that the novation was not to prejudice accrued rights and obligations, and the only thing left for the liquidated damages claim to be perfected was the Superintendent’s certification, in my respectful view, the parties cannot be found to have intended that the certification step was lost.
In this respect I do not consider that authorities such as McDonald v Dennys Lascelles Ltd,8 Westralian Farmers Ltd v Commonwealth Agricultural Service Engineers Ltd,9 and FPM Constructions Pty Ltd v Council of the City of Blue Mountains,10 govern the outcome. Here the intention of the parties was to permit the Superintendent’s certification, because there was an accrued right to obtain it, protected by clause 4.1. That clause is a specific provision that distinguishes this case from the others referred to.
I respectfully agree with the conclusion reached by the learned primary judge on this point.
RCR’s set-off contention
The question of the set-off argument raised by RCR is dealt with by Philip McMurdo JA in paragraphs [116]-[125] of his Honour’s reasons.
In my respectful view, there was considerable force in Forge’s contention that any question of such a set-off was for the final determination of accounting between the parties. That final accounting was specifically excluded from the issues to be determined by the court, as one of the “excluded issues” referred to in the order that set the questions for determination.
Clause 37.8 of the subcontract provided for one sort of set-off, but it is not the set-off that might occur at the final accounting:11
“Without limiting Clause 37.2A and 37.7, the Principal may at any time deduct or set-off from any moneys which are or may be payable to the Contractor:
a)any amounts which are due and payable or which the Principal reasonably believes are due and payable by the Contractor to the Principal pursuant to or in connection with this Contract, and
b)the Contractor has not paid.
Nothing in this Clause 37.8 affects the right of the Principal to recover from the Contractor the whole of the debt or any balance that remains owing after any deduction.
If the money payable to the Contractor is insufficient to discharge the amount due, the Principal may have recourse to the security.”
Further, the clause is expressed in terms that Forge “may” set-off. In other words, there is no obligation to do so, which reinforces Forge’s contention that RCR’s contention is one for a later time.
Forge’s claim to recourse did not mean that the resultant money fund could be disbursed without the final accounting between the parties. The step was being taken to ensure that the security did not disappear because of the expiry dates on the guarantees.
Finally, it is the case that RCR’s contention was not raised before the learned primary judge.
For those reasons I do not consider that RCR’s set-off contention should be entertained.
Conclusion
For the reasons above I would have come to the same conclusion as did the learned primary judge. Consequently I would have dismissed the appeal.
PHILIP McMURDO JA: On 24 June 2016, the Court made orders allowing this appeal and reversing the effect of the primary judgment. These were my reasons for joining in those orders.
The dispute
The appellant, which I will call RCR, entered into a contract with the first respondent, which I will call Forge, for the performance by RCR of electrical work in the construction of a power station. Forge had contracted with Diamantina Power Station (“Diamantina”) for the construction and commissioning of the power station. RCR was a subcontractor and I will refer to its contract with Forge as the Subcontract.
In the course of RCR’s performance of the Subcontract, Forge became insolvent. The other respondents to this appeal were appointed as its receivers and managers in February 2014. At about the same time, administrators were appointed to Forge and in March 2014, Forge was ordered to be wound up, the administrators becoming its liquidators.
At this time there was a progress payment outstanding from Forge in the sum of $4,208,076.88. RCR had submitted a progress claim in that sum to which the then Superintendent under the Subcontract did not respond, with the consequence, it was common ground, that RCR’s claim was deemed to be a progress certificate, obliging Forge to pay the amount claimed.
On the respondents’ case, Forge was entitled to a sum of approximately $2.5 million from RCR, as liquidated damages for RCR’s delay in the performance of its work. The Subcontract prescribed a process whereby the Superintendent would assess and certify that liquidated damages were payable for RCR’s delay. That process had not been followed as at April 2014, with the consequence, RCR said, that there was then no liability for such damages which had accrued.
As a result of Forge’s insolvency, on 17 April 2014 Diamantina, Forge and RCR entered into a Deed of Novation. By that Deed it was agreed that from 22 April 2014 the Subcontract would be discharged and there would be a new contract for the performance of the remainder of what had been the Subcontract works to which the parties would be Diamantina and RCR. By cl 4.1, RCR and Forge agreed that the discharge of the Subcontract would not affect:
“… any accrued rights, obligations, claims or liabilities arising under the Subcontract in connection with the performance of the Subcontract before the Novation Date which [Forge] and [RCR] may have against each other.”
The “Novation Date” became 22 April 2014.
“… subject to recourse by [Forge] where [Forge] remains unpaid after the time for payment.”
The Deed of Novation made specific provision for what was to happen to this security. Within 30 days of the Novation Date, Forge was to return the security or cause it to be cancelled or unenforceable, except to the extent that Forge considered that it may have a claim against RCR or Forge believed that RCR would pursue a claim against it.
On 21 May 2014, the receivers, through their solicitors, informed RCR that Forge “has or may have outstanding claims” against RCR and that consequently it was not obliged to return or cancel the security. Each guarantee was in the amount of $2,238,345.45. One of them was to expire at midnight on 3 June 2014, and was described in the primary judgment as the 2014 guarantee. The other was to expire on 16 July 2016.
By its receivers, Forge decided that it should pursue a claim for liquidated damages for delay. But the person who had been the Superintendent under the Subcontract had resigned in February 2014 (prior to the Deed of Novation) and had not been replaced. So the receivers caused Forge to appoint, or purportedly appoint, a new Superintendent, Mr Austin. Although that purported appointment was made on 3 June 2014, it was in terms which represented that his appointment was effective from 14 March 2014.
Within an hour of his appointment, Mr Austin had decided that liquidated damages for delay should be paid by RCR to Forge, in the total sum of $2,588,068.20, which he certified, purportedly pursuant to conditions of the Subcontract, as an amount due immediately.
It must be said, in fairness to Mr Austin, that he was not a newcomer to the Subcontract. He was familiar with claims which RCR had made for extensions of time. During May 2014 he had considered Forge’s claims for liquidated damages, ahead of his appointment as Superintendent. And the primary judge rejected RCR’s case that Mr Austin did not perform his duty as Superintendent, a finding which was unchallenged.
With the benefit of Mr Austin’s certificate that liquidated damages were payable, Forge by the receivers informed RCR of its intention to make a demand upon the 2014 guarantee on 3 June in order to “hold it as cash security, pending the resolution of the issues”. RCR was informed that Forge would “have recourse to the Security” for any of the amount of the liquidated damages, as certified, which remained unpaid.
The proceeding
RCR commenced proceedings to restrain Forge and the receivers from calling upon the guarantees. An application for an interim injunction was resolved on terms that the expiry date of the 2014 guarantee would be extended and that demand would not be made on the guarantees until a certain date or further order. By further orders in the trial division, that remained the position in respect of both guarantees, notwithstanding Forge’s success in the judgment under appeal. The respondents undertook not to make demand before 10 July 2016.
The essential issue in this appeal was whether Forge, since June 2014, had been entitled as against RCR to demand payment under the guarantees. By an order made on 13 October 2014, the primary judge was to determine five specific questions, three of which are within that essential issue as I have described it. Those five questions were as follows:
(1)Was Mr Austin validly appointed as the Superintendent under the Subcontract?
(2)Was there a valid certification of an amount due and payable from RCR to Forge for liquidated damages, as issued by Mr Austin?
(3)Was Forge entitled to call upon or seek to have recourse to the 2014 guarantee at any time before midnight on 3 June 2014?
(4)Was Forge entitled to call upon or seek to have recourse to the amended and extended 2014 guarantee?
(5)Was Forge entitled to call upon or seek to have recourse to the guarantee which was to expire in 2016?
(1)Mr Austin was validly appointed as the Superintendent under the Subcontract with effect from 11 June 2014.
(2)After the Novation Date and with effect from 11 June 2014, there has been a valid certification by the Superintendent under the Subcontract that the amount of $2,588,068.20 is due and payable by RCR to Forge for liquidated damages.
(3)Forge was entitled to call upon and to have recourse to the 2014 guarantee prior to its expiration by effluxion of time, in respect of Forge’s claim for liquidated damages in the amount of $2,588,068.20.
(4)Forge is entitled to call upon and have recourse to the amended and extended 2014 guarantee, in respect of Forge’s claim for liquidated damages in the amount of $2,588,068.20.
(5)Forge is entitled to call upon and have recourse to the 2016 guarantee in respect of Forge’s claim for liquidated damages in the amount of $2,588,068.20 and in respect of the Superintendent’s certification of same.
It was further ordered that RCR’s claim be dismissed.
By this appeal, RCR challenged the determination of each of the five questions. It sought orders that each question be answered in the negative. The effect of the judgment sought by this appeal was that Forge could not make demand upon either of the guarantees.
As I will discuss, it was important to the outcome of this appeal that the nature and boundaries of the case before the primary judge be understood. By the order of 13 October 2014, Wilson J ordered that those five questions be determined as separate questions under Uniform Civil Procedure Rules r 483.14 The determination of those questions was final, not interlocutory. In particular, the court was to make a final determination as to the entitlement of Forge to demand payment under the guarantees. The question was not whether, pending the resolution of whatever was in dispute between the parties, Forge should be prevented from demanding payment.
By that order of 13 October 2014, it was provided that in answering those five questions, the court was not to determine what were there described as “the excluded issues”, which were defined as follows:
“(1)What is the proper assessment on a final basis of RCR’s entitlement (if any) to extensions of time under the Subcontract (including whether RCR lost any entitlement because of failure to comply with contractual notice provisions).
(2)What is the proper assessment on a final basis of Forge’s entitlement (if any) to be paid liquidated damages by RCR.
(3)What is the proper assessment on a final basis of RCR’s entitlement to be paid by Forge in respect of the January claim?”
The “January claim” was the progress claim by RCR for $4,208,076 to which I have referred.
The Subcontract
I will discuss the potentially relevant terms of the General Conditions of the Subcontract. By cl 34.1, RCR was to ensure that the work which it was to perform would reach practical completion by the date for practical completion. Such a date was specified. But the Subcontract provided that the relevant work could be divided into portions, each with its own date for practical completion, which is what occurred.16 As Forge claimed and the Superintendent certified, RCR failed to reach practical completion for several portions and the total which was certified was an aggregation of those several claims.
Clause 34 contained provisions by which RCR could be given an extension of time by the Superintendent. As already noted, the primary judge found that Mr Austin had considered RCR’s claims for extensions of time and that finding was unchallenged. Instead, the effect of the certification of an amount of liquidated damages was challenged by legal arguments as to the proper construction of the Subcontract and the Deed of Novation.
Clause 34.7 provided in part as follows:
“If [the work] does not reach practical completion by the date for practical completion, the Superintendent shall certify, as due and payable to the Principal, liquidated damages … for every day after the date for practical completion to and including the earliest of the date of practical completion or termination of the Contract or the Principal taking [the work] out of the hands of the Contractor.
If an EOT [an extension of time for practical completion] is directed after the Contractor has paid or the Principal has set off liquidated damages, the Principal shall forthwith repay to the Contractor such of those liquidated damages as represent the days the subject of the EOT.”
“The Superintendent shall, within 10 Business Days after receiving such a progress claim, issue to the Principal and the Contractor:
(a)a progress certificate evidencing the Superintendent’s opinion of the moneys due from the Principal to the Contractor pursuant to the progress claim and reasons for any difference (“progress certificate”) and amounts otherwise due from the Principal to the Contractor or the Contractor to the Principal; and
(b)a certificate evidencing the Superintendent’s assessment of retention moneys and moneys due from the Contractor to the Principal pursuant to the Contract.
…
If the Superintendent does not issue the progress certificate within 10 Business Days of receiving a progress claim in accordance with subclause 37.1, that progress claim shall be deemed to be the relevant progress certificate.
The Principal shall within 25 business days after receiving the progress claim, pay to the Contractor the balance of the progress certificate after deducting retention moneys and setting off such of the certificate in paragraph (b) as the Principal elects to set off. If that setting off produces a negative balance, the Contractor shall pay that balance to the Principal within 5 Business Days of receiving written notice thereof.
Neither a progress certificate nor a payment of moneys shall be evidence that the subject [work] has been carried out satisfactorily. Payment other than final payment shall be payment on account only.”
RCR’s progress claim was submitted on 28 January 2014. As the primary judge found, Forge became obliged to pay the amount of that claim by 4 March 2014.
Clause 37.8, headed “Set off”, provided as follows:
“[T]he Principal may at any time deduct or set‑off from any moneys which are or may be payable to the Contractor:
(a)any amounts which are due and payable or which the Principal reasonably believes are due and payable by the Contractor to the Principal pursuant to or in connection with this Contract; and
(b)the Contractor has not paid.
Nothing in this Clause 37.8 affects the right of the Principal to recover from the Contractor the whole of the debt or any balance that remains owing after any deduction.
If the money payable to the Contractor is insufficient to discharge the amount due, the Principal may have recourse to the security.”
Clause 39, headed “Default or insolvency”, described circumstances in which the subcontract might be terminated. It provided for the termination by one party in certain circumstances of a breach of the Subcontract by the other. According to the circumstances of a breach by RCR, Forge was entitled to take out of RCR’s hands the whole or part of the work remaining to be completed. By subclause 39.6, the Superintendent was to assess the cost of the work taken out of RCR’s hands and the difference between that cost and the amount which would have been paid to RCR, if the work had been completed by it, was to be a debt due and payable to Forge.
Clause 39 also provided for the termination by one party in the event of the insolvency of the other and termination by either party for an event of force majeure. By subclause 39.15, it was agreed that any sums due to Forge from RCR “accruing prior to the date of termination or the commencement of the relevant Event of Force Majeure” would be deducted from the amount to be paid to RCR under the Subcontract and that if as a result of any such deduction, there was a negative amount payable to RCR, the amount was to be paid by RCR to Forge.
Clause 39.16 provided as follows:
“Within,
(a)90 days after the termination of the [Subcontract] under this Clause 39;
or
(b)where Clause 39.6 applies, 90 days after the completion of the Works,
or such longer period as the parties may agree, the Superintendent must certify to [the parties] any amount due to or payable by [RCR] under Clauses 39.6 and 39.15.”
Clause 20 provided for the appointment of the Superintendent. It required Forge to ensure that at all times there was a Superintendent and that the Superintendent fulfilled all aspects of the role and functions honestly and in accordance with the Subcontract.
The security to be provided by RCR for its performance was prescribed by cl 5 which relevantly relevantly provided as follows:
“5.1Provision
Security shall be provided by [RCR] in accordance with Item 13. All delivered security, other than cash or retention moneys, shall be transferred in escrow …
5.2Recourse
Security shall be subject to recourse by [Forge] where [Forge] remains unpaid after the time for payment.
…
5.4Reduction and release
…
[Forge’s] entitlement otherwise to security shall cease 28 days after final certificate.
Upon [Forge’s] entitlement to security ceasing, [Forge] shall release and return forthwith the security to [RCR].
5.4AAdditional and replacement security
(a)…
(b)If [Forge] has recourse to the security in accordance with the [Subcontract] and the security is reduced by more than 50%, upon written request from [Forge] [RCR] must provide further security in accordance with Item 13(a) to replace the amount to which [Forge] has had recourse.
5.5Trusts and interest
Interest earned on security not required to be held in trust shall belong to the party holding that security.”
“(a)cash;
(b)retention moneys;
(c)bonds or inscribed stock or their equivalent issued by a national, state or territory government;
(d)interest bearing deposit in a bank …
(e)an approved unconditional undertaking …; or
(f)other form approved by the party having the benefit of the security”.
However the form of security required by cl 5 was that specified in Item 13 of the General Conditions, namely:
“Unconditional, irrevocable on-demand bank guarantee, issued by a first class registered bank or financial institution approved by [Forge] in its absolute discretion.”
The Deed of Novation
By cl 3.1 of the Deed, it was agreed that the Subcontract would be discharged with effect on and from the Novation Date, namely 22 April 2014. At the same time a new contract was to come into force between Diamantina and RCR, on the same terms and conditions as the Subcontract except with certain amendments as set out in the Deed.
By cl 3.3 of the Deed, RCR released Forge from:
“(a)any obligation under or in connection with the Subcontract to be performed on or after the Novation Date; and
(b)any action, Claim or demand against [Forge], under or in connection with the Subcontract, which arise or accrue after the Novation Date.”
“(a)Within thirty (30) calendar days of the Novation Date, [Forge] must either:
(i)return any security held under the Subcontract (“Existing Security”) to [RCR] or the providing institution; or
(ii)where it is unable to return the Existing Security, enter into an arrangement on terms acceptable to the providing institution cancelling or agreeing not to enforce the Existing Security,
only to the extent that [Forge] does not, in its own absolute discretion, consider that it has or may have outstanding claims against [RCR] or has a reasonable belief that [RCR] has or will pursue a claim against [Forge], including commencing legal proceedings in connection with the Subcontract.”
“4.1Accrued rights unaffected
The novation and release under clause 3 do not prejudice any accrued rights, obligations, claims or liabilities arising under the Subcontract in connection with the performance of the Subcontract before the Novation Date which [Forge] and [RCR] may have against each other.”
RCR’s right to be paid the amount of its progress claim of January 2014 was an accrued right within cl 4.1. It was a debt due and payable to RCR although, according to cl 37.1 of the General Conditions, it was a payment on account only.
Forge argued that the liquidated damages, as subsequently certified by Mr Austin, constituted, in the terms of cl 4.1 of the Deed of Novation, a liability arising under the Subcontract in connection with the performance of the Subcontract before the Novation Date. It argued that the word “accrued” in cl 4.1 qualified only the word “rights” and not the words “obligations, claims or liabilities”. That interpretation could not be accepted. The “obligation” or “liability” of one party under the Subcontract would correspond with a right of the other party, such that they should each be similarly qualified by the word “accrued”. Still the question was whether, by RCR’s delayed performance of the Subcontract before the Novation Date, there was an accrued liability of RCR to pay and a corresponding accrued right of Forge to be paid liquidated damages.
Clearly cl 3.5 provided for the possibility of recourse to the security after the Novation Date. Contrary to a submission for Forge, cl 3.5 did not itself provide for the circumstances under which that could occur. It provided only for the return, release or retention of the security. Necessarily, it remained cl 5 of the General Conditions of the Subcontract which had to be considered in determining Forge’s entitlement to make demand upon the security. However that entitlement became qualified by the Deed of Novation, in that Forge’s right of recourse was limited to a right to payment which was preserved by cl 4.1 of the Deed.
Recourse to the guarantees
By cl 5.2 of the General Conditions, it was agreed that the security in the form of the bank guarantees was to be subject to “recourse” by Forge, where Forge remained unpaid after the time for payment. On RCR’s case, the effect of this provision was that Forge could not make a demand upon the bank unless money was payable to Forge by RCR. From that basis, RCR then argued that, for several reasons, nothing was (and is) payable to Forge.
But Forge argued that it could demand payment from the bank without there being, in truth, any amount payable by RCR. Forge made this claim upon two bases.
The first, which the primary judge rejected, was that cl 5 enabled Forge to demand payment from the bank for the purpose of holding the money paid by the bank as security under the Subcontract. Forge argued that cl 5.2 applied only where it sought to have “recourse” to the security, which it would not be doing by, in effect, changing the form of the security from a bank guarantee to cash.
The second reason, which the primary judge accepted, was that Forge might have recourse to the security, by demanding payment from the bank and appropriating the cash received from the bank, if Forge claimed in good faith that there was money due to be paid by RCR. Upon this argument, the right of recourse to the security was dependent upon a bona fide claim by Forge, rather than the existence of a debt due to it.
On that first argument, the primary judge held that converting the security from the form of a bank guarantee to cash would itself be an act of “recourse” to the security.17 His Honour reasoned as follows:
“[58]Forge points out that, in at least two other instances, “Recourse” is used in the Subcontract in the sense of appropriation by Forge, not mere substitution of cash as security. Clause 37.8 provides that: “If the money payable” to RCR is not sufficient to discharge the amount due from RCR, Forge “may have recourse to the security”. In cl 5.4A, “recourse” also signifies appropriation by Forge for its own purposes rather than mere conversion.
[59]But to restrict the reach of “recourse” in a similar way in cl 5.1 could give rise to a state of affairs that is most unlikely to have been intended.
[60]It would mean that, in a Subcontract which stipulates for a guarantee - not cash - as the security, Forge could, at any time and for any (or no) reason, substitute cash as the security.
[61]The predictable consequences of such an election for the relationship between RCR and the bank providing the guarantee would be likely to be the same as if Forge appropriates the cash for its own purposes. And from RCR’s perspective, as Forge presumably would have realised, those consequences would probably be unwelcome.”
The argument for Forge was that recourse to the security necessarily involved an appropriation of the proceeds of the security to the benefit of Forge. Consequently a demand upon the bank did not of itself constitute recourse to the security. It was only where the amount paid by the bank was subsequently appropriated for the benefit of Forge that there was recourse to the security. That argument assumed that Forge was entitled to effectively convert the form of security into cash, without the agreement of RCR. But the existence of that entitlement had no clear basis in the terms of cl 5, which made no reference to changing the form of the security from that which the parties agreed.
Forge argued that this right to convert the security to a cash security was supported by, in particular, the reasoning in Wood Hall Ltd v Pipeline Authority.18 In that case it was held that certain unconditional bank guarantees could be converted to cash at any time, so that the cash would be itself held as security. But it was necessary to examine the relevant terms of the contract in that case, because the present question was one of the effect of the Subcontract.
In Wood Hall there were two categories of bank guarantees. The first secured the contractor’s performance of the work and the second was provided in lieu of retention moneys. The performance guarantees were given in the context of terms of the construction contract under which the appellant was to pay to the respondent a sum of money as security for the due and faithful performance of the work and the appellant was entitled to provide, by way of an alternative to that cash security, a bank guarantee in the same sum. The court rejected an argument that the respondent could demand payment under these guarantees only if there was a failure by the appellant to perform the work. Gibbs J said in that respect:19
“The Authority is not required to prove that there has been a want of “due and faithful performance of the Work” as a condition of receiving payment under condition G4.1. The payment [by the Contractor] is to be made on or before the execution of the contract, and when paid is held as security. There seems to me to be nothing incongruous in holding that the Authority may resort to the alternative security in accordance with its own terms, and, having demanded and received payment under it, must hold the money received as if it were the sum provided under condition G4.1.”
Importantly, that contract expressly provided for the security to be held in the form of cash. In the present case, although the definition of “security” in cl 1 of the General Conditions included security constituted by “cash” and although cl 5 referred to security in that form, unambiguously the parties agreed that the security which was to be provided would be in the form of bank guarantees, rather than cash. Further, if the parties had agreed that the security could be in the form of cash, according to cl 5 the cash would not have been held “in escrow” and Forge, not RCR, would have been entitled to the interest earned, making it unlikely that it was intended that Forge could alter the form of the security.
The other guarantees in Wood Hall were in substitution for retention money. The contract itself did not provide for those guarantees: they were accepted by the respondent under a subsequent agreement between the parties. Absent the retention guarantees, the same sum or sums of money would have been retained by the respondent. It was held there was nothing in the subsequent agreement between the parties, by which the guarantees were provided, which prevented the respondent from resorting to those guarantees in accordance with their own (unconditional) terms and if it did so, the respondent was then hold them as retention moneys according to the contract. Again it could be seen that the contract in that case specifically provided for cash to be held as security, expressly as retention moneys. The Subcontract was different, because the parties had agreed that the security would be only in the form of bank guarantees.
Forge’s argument also cited the decision of the New South Wales Court of Appeal in Malaysia Hotel (Aust) Pty Ltd v Sabemo Pty Ltd.20 But again, the contract there was in materially different terms. In particular, it provided for a fund of retention moneys, to be held in the joint names of the proprietor and the builder in an interest bearing deposit. It further provided that with the agreement of the proprietor, those retention moneys could be substituted by a bank guarantee, in unconditional terms. It was held that the proprietor should not have been restrained by an interlocutory injunction from making demand under the guarantee, the effect of which would have been to yield funds which, according to the express terms of the contract, would then have been banked to the joint account as retention moneys. Clearly in the case of that contract, there was provision for the conversion of the form of security into a cash security.
In another case cited in Forge’s argument, a decision of the Victorian Court of Appeal in Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd,21 Wood Hall was distinguished as a case where the contract permitted the security to be converted into cash without that involving recourse to the security.22
In Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (In liq),23 Gibbs ACJ, interpreting a term of a building contract by which the proprietor was to have a “right to have recourse to any security provided by the builder”, said that:
“One has ‘recourse’ to a security by resorting to it for the purpose of gaining some benefit from it …”.
I accepted, as Forge argued, that the term “recourse” had such a meaning in the Subcontract, including within cl 5. But the difficulty for Forge’s case was that the Subcontract contained no agreement for the proceeds of the bank guarantees to be held as security. A demand upon the guarantees could therefore be made only for the purpose of Forge having recourse to that security.
When the receivers wrote to RCR on 3 June 2014, informing it of their intention to make demand upon the guarantees, they said that they intended to convert the guarantees into cash to be held as cash security. But in the same correspondence, they advised that Forge would “have recourse to the Security” for any unpaid amount of the liquidated damages. That correspondence indicated that the cash would be held as security for but a few days if RCR did not pay the amount of liquidated damages as certified. There followed this litigation in which the parties joined issue on the entitlement of Forge to have recourse to the security. Consequently, the question of whether Forge was able to convert the form of security rather than have recourse to it, was of little practical importance. But if it mattered, the terms of the Subcontract did not permit Forge to convert the security into the form of cash. There was no express term to that effect and essentially for the reasons given by the primary judge, such a term could not be implied.
The submission which the primary judge did accept was that the “entitling condition” to the right of recourse to the security was the existence of a bona fide claim to payment by RCR, rather than an entitlement to payment. His Honour rejected RCR’s case that there was a right of recourse only where Forge had admitted or proved a right to payment. His Honour said:
“[71]There are indications in the Subcontract that cl 5 was supposed to function not just as means of providing security for debts due and payable but also as a risk allocation device, allocating the risk as to which party would be out of pocket pending resolution of a dispute in respect of a claim made by Forge in good faith.”
His Honour’s reference to a “risk allocation device” came from the authorities which he then discussed, namely Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd25 and Redline Contracting Pty Ltd v MCC Mining (Western Australia) Pty Ltd.26
“The critical question which this court must decide is whether the relevant commercial purpose of the agreement was to provide security to Varnsdorf, so that a valid claim to damages (whether or not Time Damages) would be secured or whether clauses such as 3.13 made provision for an allocation of the risk between Fletcher and Varnsdorf - showing which party was to be out of pocket pending resolution of any dispute. If the contractual intention of the parties was the first of these alternatives, cl 3.13 would give Varnsdorf no authority to call on the letters of credit pending resolution of any dispute. On the other hand, if the second alternative were to be preferred, a question would remain whether there was any relevant qualification or prohibition affecting Varnsdorf’s ability now to call on the security. In my view the terms of the agreement show that the commercial purpose of this agreement was to provide an allocation of risk and that Varnsdorf is entitled, under cl 3.13, to call on the security provided by Fletcher, notwithstanding that there is a genuine dispute and a serious issue to be tried as to whether Handover has been reached.”
(Emphasis added.)
In the same case, Callaway JA said:28
“There are broadly two reasons why the beneficiary might have stipulated for a guarantee. One is to provide security. If it has a valid claim and there are difficulties about recovering from the party in default, it has recourse against the bank. The second reason, which is additional to the first, is to allocate the risk as to who shall be out of pocket pending resolution of a dispute. The beneficiary is then able to call upon the guarantee even if it turns out in the end, that the other party was not in default … It is a question of construction of the underlying contract whether the guarantee is provided solely by way of security or also as a risk allocation device. Remembering that we are speaking of guarantees in the sense of standby letters of credit, performance bonds, guarantees in lieu of retention moneys and the like, the latter purpose is often present and commercial practice plays a large part in construing the contract. No implication may be made that is inconsistent with an agreed allocation of risk as to who should be out of pocket pending resolution of a dispute and clauses in the contract that do not expressly inhibit the beneficiary from calling upon the security should not be too readily construed to have that effect. As I have already indicated, they may simply refer to the kind of default which, if it is alleged in good faith, enables the beneficiary to have recourse to the security or its proceeds.”
(Emphasis added)
That passage from the judgment of Callaway JA was cited with approval by the Full Court of the Federal Court in Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd.29 The court (French, Jacobsen and Graham JJ) observed that an injunction could issue against a party in whose favour a performance bond has been given where that party has contracted not to call upon the bond in the relevant circumstances.30 The court said that the primary focus will always be upon the proper construction of the contract,31 but that in that exercise of construction, a factor to be considered is “the importance of such instruments in the construction industry, both nationally and internationally.”32 The court said that it followed that clear words would be required to support a construction which inhibited a beneficiary from calling upon a performance guarantee where a breach was alleged in good faith, that is “non‑fraudulently”.33 Clough was also a case where the relief sought (and refused) was an interlocutory injunction.
Redline Contracting Pty Ltd v MCC Mining (Western Australia) Pty Ltd is a decision of Siopis J in the Federal Court, upon a contract which provided for recourse to a security in relevantly identical terms to those of cl 5 of the Subcontract. An interlocutory injunction to restrain a respondent from calling upon four unconditional undertakings, given as security for the builder’s performance, was refused. The applicant had argued that the respondent could have recourse to the security only if “unpaid after the time for payment” (as cl 5.2 provides in the present case) and that this meant payment “of an amount which has been determined as owing pursuant to a mechanism under the contract, and which is not the subject of a set off”.34 The applicant had relied upon the circumstances that there had been no determination under the contract of the amounts which the respondent said were payable and that in any event, those claims were subject to being set off against amounts which were claimed by the applicant (but disputed). After discussing Clough Engineering, Siopis J reasoned as follows:
“[31]First, the contract is to be construed in its commercial context, namely, that performance guarantees and like instruments, are treated as providing the beneficiary thereof with a security which is only defeasible in such limited circumstances, that it is to be regarded as approximating cash. Further, the parties to a contract which provides for the issue of a performance bond, are to be taken as having contracted, in the knowledge of the special status accorded to performance bonds in the industry, and the legal principles relating to the construction of contractual terms insofar as they affect the right of a beneficiary to call upon a performance bond.
…
[34]Secondly, the contract must be construed in light of the whole contract and the language of the performance bond itself. In this case, the relevance of the language used in the unconditional undertaking to the question of construction, is demonstrated by the fact that the parties contracted for the unconditional undertaking to be supplied in the specific form annexed to the contract …
…
[36]On the basis of the contentions made at this hearing, it is my view, that there is not sufficient likelihood of Redline succeeding in making good its contention in relation to the proper construction of cl 5.2 at trial, to justify the maintenance of the status quo until trial, by enjoining MCC Mining from calling upon the unconditional undertaking. I am of the view, that it is more likely that at trial, the words “time for payment” in the phrase “a party remains unpaid after the time for payment” in cl 5.2 of the contract, will be construed as referring to the time specified by MCC Mining for Redline to make the payment demanded and not as importing the inhibiting restrictions contended for by Redline; and that cl 5.2 will be construed as a clause intended to allocate risks pending the resolution of the underlying dispute.”
In the present case, the primary judge said that that reasoning in Redline was persuasive35 and concluded that cl 5 permitted “recourse on a bona fide claim”.36 Although there was no express finding that the claim was bona fide, his Honour proceeded upon that premise, apparently upon an understanding that although the contrary had been pleaded by RCR, that case was not being pressed.
In Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd,37 the New South Wales Court of Appeal issued an interlocutory injunction restraining a proprietor from converting into cash an unconditional undertaking provided by the applicant for the performance of a building contract. The respondent had called upon the undertaking, in the form of performance bonds, in reliance upon non‑compliance with a notice to remedy defects which it had given to the applicant. Clause 16.3 of the contract provided that the performance bonds could be called upon if the applicant failed to comply with a notice given under cl 16.2, which provided for a notice to remedy to be given to the applicant if it had “not materially complied with its obligations under this contract”. The principal judgment was given by Macfarlan JA, who noted that cl 16.2 was “not conditioned upon the respondent being satisfied of the existence of material non‑compliance by the applicant with its obligations [but rather that it was] conditioned … upon the objective fact of such non‑compliance.”38 In that respect Macfarlan JA disagreed with the primary judge, who had relied upon Clough Engineering in support of the contrary view. Macfarlan JA said:
“[38]Because Clough is distinguishable and its correctness was not fully debated before this Court, I refrain from expressing a concluded view as to its correctness. It is appropriate however for me to indicate that I have reservations about its correctness.
[39]There are at least two principal goals that parties may seek to achieve by requiring that performance bonds be provided by a contractor to a principal in circumstances such as the present.
[40]One is to provide security in the event of the insolvency of the contractor. The other is to enable the principal to obtain prompt payment of amounts it claims, notwithstanding disputes raised by the contractor. Not every contract seeks to achieve both goals. The present one is one in which only the first is sought to be achieved. To assist in achieving the first goal the Contract thus states that the bonds to be provided are to be “unconditional”, with the consequence that the issuer is obliged to pay, without argument, if called upon the respondent to do so.
[41]So far as the second goal is concerned, Clause 16.2 however only entitles the respondent to call upon the bonds if, as a matter of objective fact, the applicant “has not materially complied with its obligations”. Accordingly, it is open, as has occurred here, for the applicant to seek to restrain the respondent from calling upon the bonds upon the basis that the pre‑condition has, at least arguably, not been satisfied.
[42]The position would have been different if Clause 16.1 had made the respondent’s entitlement to call upon the bonds dependent on the respondent’s satisfaction or even simply upon the respondent’s assertion that the applicant was in breach of the Contract. Provisions of this type would have gone a long way to achieving the second of the goals to which I have referred above.
[43]My reservation about the decision in Clough is as to whether the contract in that case can truly be regarded as having been intended to achieve both purposes. Certainly the terms of the performance guarantee that the Full Court relied upon made it clear that the issuer of the guarantee could not withhold payment if a proper call were made but the condition precedent to the principal’s right to call upon the guarantee was expressed in terms of objective fact, that is ‘in the event of the Contractor failing to honour any of the commitments entered into under this Contract’ … It is not obvious to me why the terms of the guarantee given by the issuer should have been regarded as affecting the proper construction of this provision which related to the circumstances in which the Principal was entitled to call on the guarantee.”
The reasoning of Macfarlan JA illustrates the limited relevance of the unconditional nature of the third party’s promise to pay the principal, in the construction of the contract between the principal and the contractor. As Macfarlan JA explained, the unconditional nature of the third party’s undertaking could be seen as serving merely the purpose of protecting the principal from the risk of the contractor’s insolvency. Secondly, his Honour’s reasoning illustrates the way in which a principal will be susceptible to a restraint by an injunction if attempting to have recourse to the security without fulfilment of a necessary precondition to that recourse.
By cl 5.2 of the Subcontract in this case, the security was subject to recourse “where [the Principal] remains unpaid after the time for payment.” On the ordinary meaning of those words, the precondition to recourse to the security was the fact of money being unpaid to the Principal. Clause 5.2 was not in terms which referred to a belief, or grounds for a belief, that money remained unpaid. Because recourse to the security was permitted only where in fact money remained unpaid, in my view it was necessarily implied that recourse was not permitted, and that the Principal should not attempt to have recourse to the security, where there was not money which remained unpaid to it. There was thereby a negative stipulation which could be the basis for an injunction restraining Forge from making demand on the bank guarantees. In my view, the unambiguous terms of cl 5.2 should not be construed as they were by the primary judge.
There was a further reason why, in the present case, the relevant condition for recourse to the security was not that described by the primary judge. Assuming that the construction of cl 5.2 was affected by the security being a risk allocation device, as discussed in Fletcher Construction and Clough, the construction for which Forge contended could not have been relevant in the present context, where there was a trial, rather than an interlocutory application, in which the entitlement to recourse to the security was to be determined. I have emphasised in the passages from Fletcher Construction and Clough which are set out above the nature of the risk which is being allocated, which is the risk of being out of pocket pending resolution of the dispute. RCR was not seeking an interlocutory injunction from the primary judge. It was seeking a final resolution of the question of Forge’s entitlement to have recourse to the guarantees. More specifically the fourth and fifth questions which were to be determined by this judgment were questions about the present entitlement of Forge to call upon or have recourse to the guarantees. In that context, RCR sought to prove that Forge had no such entitlement, pleading that Forge had no entitlement to liquidated damages either because there had not been a valid certification under the Subcontract or that they were precluded by a set off of the debt due by Forge to RCR. If that case was proved by RCR, on no possible view of cl 5.2 could Forge be entitled to recourse to the security. The implication that a security could be called upon merely where there was a claim in good faith could have no operation once the absence of merit in that claim was established.
“If a provision in a building contract requiring a performance bond is intended to operate as a risk allocation device pending the final determination of the dispute between the parties then that intention must be fundamental to a consideration of the justice of an application made to restrain recourse to such a bond pending final determination of the dispute.”
Entitlement to liquidated damages
I have set out above cl 34.7 of the General Conditions, by which the Superintendent (if any) was to certify, as due and payable to the Principal, liquidated damages for delay. The primary judge accepted RCR’s argument that a cl 34.7 certificate was necessary to establish a liability of RCR to pay liquidated damages for delay.40 His Honour rejected Forge’s argument that cl 34.7 conferred an entitlement to liquidated damages, according to the period of delay and the specified rate of damages, even without a Superintendent’s certificate which, as his Honour described the argument, would make the certificate “a convenient, but not exclusive, mechanism for establishing a liability in RCR to pay”.41
The primary judge described two difficulties in the way of Forge’s argument, as follows:
“[38]First, the language chosen apparently to describe the source of the obligation - “the Superintendent shall certify, as due and payable…” - accords with the idea that certification is essential to liability to pay.
[39]Secondly, by cl 34.5, even if RCR has not claimed an extension of time, the Superintendent is empowered, in his ‘absolute discretion at any time and from time to time before issuing the final certificate’ to direct an ‘EOT’. An exercise of that power would reduce, if not negate, liquidated damages otherwise payable for delay.
[40]So the assessment is not inevitably a mere mathematical exercise based on the number of days of delay after the date for practical completion fixed by the Subcontract.”
By a Notice of Contention, Forge challenged that reasoning. It submitted that the certification process was merely “procedural or mechanical”. But that particular submission could not be accepted, essentially for the second of the reasons in that extract from his Honour’s judgment.
It was further submitted that Forge’s construction “is even clearer if RCR is correct about its contention that the Superintendent’s certification function ceases at termination because it cannot be that Forge’s entitlement to liquidated damages ceases with it”. That submission appeared to refer to RCR’s case that there was no power to appoint a Superintendent after the discharge of the Subcontract by the Deed of Novation. That submission must be discussed below; but the present question is one of the interpretation of cl 34.7, before determining the impact upon its operation of the Deed of Novation. Clause 34.7 empowered the Superintendent to certify an amount of liquidated damages, where appropriate, for a period of delay between the date for practical completion and the “termination of the contract.” Therefore there was no risk, as the submission for Forge might have suggested, that a “termination of the contract”, in a sense of that expression in cl 34.7, would put paid to the prospect of liquidated damages becoming payable by a Superintendent’s certificate.
In my view the primary judge was correct in saying that a cl 34.7 certificate was necessary to establish a liability to pay liquidated damages for delay.
His Honour held that such a certificate of itself was sufficient to create that liability, rejecting the argument for RCR that a further certificate from the Superintendent, this time issued pursuant to cl 37.2, was required. This is was an argument which did not appear to have been repeated by RCR in this court. In any case I would have agreed with the primary judge in rejecting it. Clause 37.2 provided for what a Superintendent is to do in the context of a progress claim. It did not confine the Superintendent’s power to certify for liquidated damages under cl 34.7 to the circumstance of the assessment of a progress claim.
Consequently there was no debt which could be said to be payable as liquidated damages until 3 June 2014, even assuming that there was then a validly appointed Superintendent with a power to certify under cl 37.4. In the events which had occurred before the Novation Date, the timing of RCR’s performance of the Subcontract had been such that, absent extensions of time of the relevant dates for practical completion, a Superintendent (if any) would have then been able to certify for liquidated damages. The question was whether there was thereby an accrued right (of Forge) or liability (of RCR) which was therefore preserved pursuant to cl 4.1 of the Deed of Novation.
The primary judge concluded that, notwithstanding the Deed of Novation, Forge remained entitled to appoint a Superintendent who was able to certify for liquidated damages under cl 34.7. His Honour rejected RCR’s submission that if the creation of the liability or obligation depended upon the further performance of the Subcontract, by the appointment and supervision of the Superintendent by Forge under cl 20, then the obligation or liability had not accrued in the terms of cl 4.1. His Honour’s reasoning on this question was as follows:
“[28]The notion that the Deed was to deny Forge the chance to obtain a cl 34.7 certification for liquidated damages payable because of RCR’s established delay in achieving practical completion lacks attraction.
[29]Moreover, Forge’s liquidated damages claim arises from RCR’s ‘performance of the Subcontract before the Novation Date’, which is an indication that far from impacting adversely on Forge’s right to appoint a Superintendent post‑termination, the Deed of Novation preserved it.”
To discuss this question, it is necessary, as the primary judge did, to first consider the effect of the Subcontract before the Deed of Novation. As already discussed, cl 34.7 empowered the Superintendent to certify for damages for delay to a date which was the date of termination of the contract. Therefore under the Subcontract, that power of the Superintendent was not lost by what cl 34.7 refers to as a “termination”. The word “termination” was not defined by the Subcontract. Very arguably, it referred to a termination in any of the circumstances in which the Subcontract could be terminated according to cl 39. And the Superintendent was empowered by several provisions within cl 39 to certify the amount to be paid by one side or the other.43 This required the continuing performance of the role of the Superintendent and thereby the performance by Forge of its promises within cl 20 to ensure that there was a Superintendent and that the Superintendent fulfilled all aspects of his role and functions honestly and in accordance with the Subcontract. Therefore I agreed with the primary judge that according to the Subcontract, before consideration is given to the Deed of Novation, there was a power and indeed a duty to appoint a Superintendent after a termination of the Subcontract, under any of the provisions within cl 39.
However I was unable to agree that after the Novation Date, Forge remained entitled to appoint a Superintendent to enable certification under cl 34.7. I accepted, as the primary judge said, that Forge’s liquidated damages claim could be said to arise from RCR’s “performance of the Subcontract before the Novation Date.” The existence of that nexus was an essential condition for the preservation of a right, obligation, claim or liability under cl 4.1 of the Deed. But it was not a sufficient condition: the right, obligation, claim or liability had to have accrued in the relevant sense.
Clause 4.1 qualified, or at least explained, the effect of the novation and release under cl 3 of the Deed. The Subcontract was to be discharged with effect on and from the Novation Date. On and from that date, Forge was to be released from any obligation under or in connection with the Subcontract “to be performed on or after the Novation Date.” By cl 3, RCR and Forge agreed that there would be no further performance of the Subcontract. Consequently, if the existence of a right, obligation, claim or liability depended upon some further performance of the Subcontract, it could not be said to be “accrued” in the relevant sense.
Forge argued that cl 4.1 was concerned with more than simply preserving accrued rights. It was said that cl 4.1 was concerned also with “claims” and that by cl 1 of the Deed, a claim included “any allegation, debt, cause of action, liability, claim, proceeding, suit or demand of any nature as however arising and whether present or future, fixed or ascertained, actual or contingent.” Clause 4.1 did not preserve all claims but only “accrued” claims.
“[T]he contract is not rescinded as from the beginning. Both parties are discharged from the further performance of the contract, but rights are not divested or discharged which have already been unconditionally acquired.”
And in Westralian Farmers Ltd v Commonwealth Agricultural Service Engineers Ltd,46 Dixon and Evatt JJ said:47
“In general the termination of an executory agreement out of the performance of which pecuniary demands may arise imports that, just as on the one side no further acts of performance can be required, so, on the other side, no liability can be brought into existence if it depends upon a further act of performance. If the title to rights consists of vestitive facts which would result from the further execution of the contract but which have not been brought about before the agreement terminates, the rights cannot arise. But if all the facts have occurred which entitle one party to such a right as a debt, a distinct chose in action which for many purposes is conceived as possessing proprietary characteristics, the fact that the right to payment is future or is contingent upon some event, not involving further performance of the contract, does not prevent it maturing into an immediately enforceable obligation.”
“It is the principal’s duty to ensure that ‘there is a superintendent’ and that the superintendent acts in the manner prescribed. There is nothing in clause 23 itself which suggests that the contractual obligation thus imposed on the principal continues to operate after the termination of the contract pursuant to clause 44.4. Nor, in my view, can questions of ‘obvious good sense’ prevail over the clear intention of the specific clauses identified above. The only question for the Court is whether the parties have reached agreement to that effect or not.”
Referring to McDonald v Dennys Lascelles Ltd and Westralian Farmers Ltd, Basten JA said:51
“[Those cases] makes clear a distinction between a right to payment in the future which is contingent upon an event which does not involve further performance of a contract and one which does. It is only in the former case that an accrued right can be said to have arisen. That distinction returns one to the terms of the contract in order to determine whether a future contingency depends upon the further performance of the contract. To the extent that the contingency in the present case requires the continued exercise of power by the superintendent, pursuant to clause 23, it requires the further performance of the contract by the principal whose obligation it is to see that there is a superintendent and that the superintendent discharges its functions in the prescribed manner.”
Basten JA and Giles JA (who dissented) referred to another decision of that court in Peninsula Balmain Pty Ltd v Abigroup Contractors Pty Ltd,52 which concerned the power of a superintendent, after termination of the contract, to extend time in the context of a provision for liquidated damages in substantially similar terms to those of cl 34.7 in the present case. Hodgson JA (with whom Mason P and Stein JA agreed) there noted that this provision expressly operated after the contract had been terminated (of which the same could be said of the present cl 34.7). Hodgson JA said that had an application been made for an extension of time prior to the termination, but not yet determined at that time, the superintendent would have had power to determine that claim after termination.53 That reasoning supports the primary judge’s conclusion that apart from the Deed of Novation, there was a power to certify for liquidated damages after termination of the Subcontract. But the present question involved the effect of the Deed, for which the reasoning of Basten JA in FPM Constructions is persuasive. According to that reasoning, which I would respectfully adopt here, the appointment and supervision of the Superintendent in the present case involved a further performance of the Subcontract, specifically of the promises by Forge within cl 20.
Because Forge had a right to liquidated damages only upon certification by the Superintendent, it could become entitled to those damages only by a further performance of the Subcontract. But the parties agreed within the Deed of Novation that the Subcontract would not be further performed and therefore there was no accrued right or claim to such damages nor any accrued obligation or liability to pay them.
It follows that Mr Austin was invalidly appointed, because his appointment could be effected only by a further performance of the Subcontract. The first of the questions for determination at this trial should have been answered in the negative. It follows also that his purported certification for liquidated damages was of no effect, so that the second question should also have been answered in the negative. And it follows that the only amount which Forge claimed was unpaid to it, being the sum purportedly certified as liquidated damages for delay, had at no time been payable, so that according to cl 5.2 of the General Conditions, Forge was not entitled to make demand for payment under either of the guarantees. Each of questions 3, 4 and 5 ought to have been answered in the negative.
Set off
A further argument for RCR was that there has been and is no amount payable to Forge, because against any liability for liquidated damages should be set off against RCR’s debt under the deemed progress certificate.
That argument was not put to the trial judge although it was pleaded by RCR. In this court Forge objected to the argument, by suggesting that it should not be considered having regard to the conduct of RCR’s case at the trial.
In paragraph 20 of Forge’s Defence, it was pleaded that Forge was entitled to liquidated damages, in the sum later certified by Mr Austin, when the Deed of Novation was executed and that this entitlement was not affected by the discharge of the Subcontract pursuant to the Deed. This entitlement was pleaded as Forge’s case was argued, namely that Forge’s entitlement to damages existed without a certification by the Superintendent or alternatively, Forge was entitled to have this amount certified.
In response to that part of the Defence, RCR pleaded in its Reply that its progress claim of $4,208,076 was outstanding immediately prior to the Novation Date so that:
“11.(f)… any entitlement Forge had to $2,588,066.20 liquidated damages arising under the Subcontract (which is denied) was, by the $4,628,884.5754 accrued entitlement RCR had under the January claim:
(i)extinguished by operation of clause 37 of the Subcontract;
(ii)further or alternatively, extinguished as a result of equitable set‑off;
(iii)further or alternatively, after the date of Forge’s liquidation on 18 March 2014, extinguished as a result of set‑off under section 553C of the Corporations Law 2001 (Cwth) … .”
Section 553C was not presently relevant. It is engaged where a person wants to have a debt or claim admitted against a company in liquidation. The question here was whether at any relevant time, there has been money unpaid to Forge thereby providing a right of recourse to the security.
Forge submitted that the pleas of set off were relevant only to a final accounting between the parties and not to the issues which were directed to be determined by the primary judgment. It argued that these questions of set off would be relevant only in the determination of the “excluded issues”, as they were called in the order which defined questions for determination by the primary judge. Those excluded issues are set out and discussed above at [53] - [54]. As I have explained, the position at any relevant time was that there was a debt due to RCR which well exceeded the debt which Forge said was due to it. The existence of a set off, under the general law or according to the terms of the Subcontract, depended upon the facts pleaded in paragraph 11 of RCR’s Reply and not upon any further acts which might be relevant to one or more of the excluded issues.
If, as Forge argued, these questions of set off could not have been determined at the trial, it would not have been possible for the court to fairly answer questions 3, 4 and 5, or in other words, to make a final determination of the existence or otherwise of a right of recourse to the security.
The suggestion underlying Forge’s argument was that a consideration only of the debt to RCR and the debt said to be due for liquidated damages would involve a view of an incomplete picture, because of a possibility that there could be other amounts to be brought into account. But Forge’s argument could not identify any possible further claim by Forge and on the evidence, a suggestion that there could be such a further debt to Forge appeared to be quite unrealistic. In the correspondence between the parties, there was no indication of any possible further claim by Forge.
What had to be considered in this appeal was whether there was an amount unpaid to Forge. If, as a matter of law (either under the general law or according to the Subcontract) the debt due to RCR was a complete answer to a liability to pay the amount claimed by Forge, then this would have provided a reason to deny Forge recourse to the security (if contrary to my conclusion, Forge had an accrued right to the liquidated damages). The questions raised by paragraph 11 of the Reply were questions of law and there could have been no relevant prejudice to the respondents by their determination within this appeal.
I have set out above the terms of cl 37.8 of the Subcontract, which enabled the Principal to deduct or set off from any moneys payable to the Contractor any amounts which were, or were believed to be due and payable to the Principal. Clause 37.8 further provided that it did not affect the right of the Principal to recover from the Contractor the whole of the debt or any balance that remained owing after any deduction and that “if the money payable to the Contractor [was] insufficient to discharge the amount due, the Principal might have recourse to the security.” Clause 37.8 thereby revealed the intention of the parties that the Principal should have recourse to the security only where, after giving credit for what it owed to the Contractor, there was a balance remaining unpaid to it. On that construction of the Subcontract, I would have (again) concluded that there was no amount unpaid to Forge by which it could have recourse to the security.
Conclusions and orders
(1)Allow the appeal.
(2)Set aside the orders made on 17 August 2015.
(3)Each of the questions referred to in paragraph 1 of the application filed 8 October 2014, and ordered to be determined as separate questions by the order of 13 October 2014, be answered in the negative.
(4)Declare that from and after 22 April 2014, the first respondent has not been and is not entitled to call upon or seek to have recourse to the 2014 Guarantee or the 2016 Guarantee, as those instruments are identified in the statement of claim and either in their original terms or as amended from time to time.
(5)Remit the balance of the claim to the Trial Division.
(6)The respondents to pay the appellant’s costs of the proceeding to date in the Trial Division and of this appeal.
[2015] QSC 186, [40]. ↩
Reasons of Philip McMurdo JA, paragraph [105]. ↩
Reasons below [30]. ↩
Reasons below [20]. ↩
And the corresponding right, on the part of RCR, to have a Superintendent appointed. ↩
Reasons below [38]-[47]. ↩
Reasons below [28]-[29]. ↩
(1933) 48 CLR 457; [1933] HCA 25. ↩
(1936) 54 CLR 361; [1936] HCA 6. ↩
[2005] NSWCA 340. ↩
Emphasis in the original clause. ↩
RCR O'Donnell Griffin Pty Ltd v Forge Group Power Pty Ltd and Ors [2015] QSC 186. ↩
Made 17 August 2015. ↩
Which provides that the court may make an order for the decision by the court of a question separately from another question, whether before, at, or after the trial or continuation of the trial of the proceeding.
RCR O'Donnell Griffin Pty Ltd
Forge Group Power Pty Ltd
(1978) 141 CLR 335
(2008) 249 ALR 458
(1933) 48 CLR 457
(1997) 42 NSWLR 462
(1936) 54 CLR 361
(1979) 141 CLR 443
(1998) 3 VR 812
On my construction of cl 5.2, the commercial considerations identified in Fletcher Constructions and Clough would nevertheless have been relevant, in affecting whether the balance of convenience favoured the issue of an interlocutory injunction restraining recourse to the security. A court hearing an interlocutory injunction would have been alert to the risk that if the Principal was to be enjoined from having recourse to the security, pending resolution of the dispute as to whether it was entitled to do so, the benefit to the Principal of the security could be substantially diminished. In that way I would endorse the statement by Osborn and Ferguson JJA in Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd that:39
The notion that rights, obligations, claims or liabilities should not be preserved if their existence required some further performance of the Subcontract, is consistent with the general law affecting discharge of contracts. In McDonald v Dennys Lascelles Ltd,44 Dixon J said that when a contract was terminated by one party for the breach of the other:45
It was unnecessary then to determine whether RCR was also entitled to an equitable set off. The question there would have been whether it would be unconscionable for Forge to insist upon satisfaction of its claim without giving credit for the debt which it owned to RCR.55
Cl 37.2 of the General Conditions of the Subcontract. ↩
General Conditions cl 4. ↩
[2015] QSC 186 at [62]. ↩
(1979) 141 CLR 443; [1979] HCA 21. ↩
(1979) 141 CLR 443, 453-454. ↩
(1993) 11 BCL 50. ↩
[1998] 3 VR 812. ↩
[1998] 3 VR 812, 819-820 per Charles JA. ↩
(1978) 141 CLR 335; [1976] HCA 45. ↩
(1978) 141 CLR 335, 351. ↩
(2008) 249 ALR 458; [2008] FCAFC 136. ↩
[2011] FCA 1337. ↩
[1998] 3 VR 812, 821. ↩
(1998) 3 VR 812, 826-827. ↩
(2008) 249 ALR 458, 478-479 [79]. ↩
(2008) 249 ALR 458, 478 [77]. ↩
Ibid. ↩
(2008) 249 ALR 458, 479 [81]. ↩
(2008) 249 ALR 458, 480 [83]. ↩
[2011] FCA 1337 at [25]. ↩
[2015] QSC 186 at [88]. ↩
[2015] QSC 186 at [90]. ↩
(2012) 28 BCL 226; [2010] NSWCA 283. ↩
[2010] NSWCA 283 at [36]. ↩
(2015) 31 BCL 407; [2015] VSCA 98 at [21]. ↩
[2015] QSC 186 at [41]. ↩
[2015] QSC 186 at [35]. ↩
[2015] QSC 186 at [30]. ↩
As discussed above at [26]. ↩
(1933) 48 CLR 457; [1933] HCA 25. ↩
(1933) 48 CLR 457, 476-477. ↩
(1936) 54 CLR 361; [1936] HCA 6. ↩
(1936) 54 CLR 361, 379-380. ↩
[2005] NSWCA 340. ↩
See the description of the clause in the judgment of Giles JA at [31]. ↩
[2005] NSWCA 340 at [185]. ↩
[2005] NSWCA 340 at [192]. ↩
(2002) 18 BCL 322; [2002] NSWCA 211. ↩
[2002] NSWCA 211 at [80]. ↩
The amount of RCR’s progress claim including GST. ↩
Roadshow Entertainment v (ACN 053 006 269) Pty Ltd (1997) 42 NSWLR 462, 481 (Gleeson CJ, Handley JA and Brownie AJA); Miwa Pty Ltd v Siantan Properties Pte Ltd [2011] NSWCA 297 at [53] per Campbell JA (McColl JA agreeing). ↩