Rejan Constructions Pty Ltd v Manningham Medical Centre Pty Ltd [2002] VSC 579

Supreme Court of Victoria|2002-12-20|Before: Byrne J

Building contracts - security - bank bond - nature and role of security - whether entitlement "to exercise right under the contract in respect of security". AS2124-1992, AS4300-1995.

By a building contract in writing dated 15 January 2002 entered into between the plaintiff, Rejan Constructions Pty Ltd, as Contractor and the defendant, Manningham Medical Centre Pty Ltd (then called Sovereign Gardens Pty Ltd), as Principal, the Contractor agreed to design and construct a new multilevel medical centre in Doncaster for the sum of $8,380,000. The building contract adopted as its terms the Standards Australia general conditions AS 4300-1995.

In October 2002, the parties fell into dispute and it is common ground that the building contract is now at an end. As will appear, there are competing views as to how and by whom this agreement was terminated and as to the legal consequences. The Principal contends that, by reason of its lawful termination of the building contract, it is entitled to recover from the Contractor damages which it has assessed as $697,747. It has on 21 November 2002 given notice to the Contractor of its intention to convert into cash two bank bonds provided by the Contractor to secure its performance of the building contract. These bonds take the form of unconditional promises to pay upon demand in writing. The Contractor responds by bringing this proceeding seeking orders to restrain the Principal from calling upon the security. By application brought by summons filed on 3 December 2002, the Contractor seeks interlocutory injunctions restraining the Principal from making a demand under the bank bonds and from receiving payment of the proceeds of the bonds.

I should state at the outset that, since the bonds have not yet been called upon, there is no question of my granting the second of the injunctions sought. In any event, should the Principal be entitled to call upon the bonds, there is no term in the contract which precludes it from receiving the payment of the proceeds.

The principles which I apply in approaching this application have recently been restated. It may be convenient that I set them out shortly.

(1) A banker's bond imposes upon the surety the obligation to pay on demand up to the limit of the security. The court will not interfere in this obligation except in very limited circumstances which include, and may even be limited to, a clear case of fraud of which the surety is aware[2].

(2) As between the grantor of the security and the beneficiary, in this case the Contractor and the Principal respectively, the rights of the beneficiary to make a demand upon the surety may be qualified by the terms of the contract between the grantor and the beneficiary[3].

(3) Absent some such qualification, the right of the beneficiary is unfettered.[4] Whether such a qualification exists and in what circumstances it operates, is a matter for interpretation of the contract between the grantor and the beneficiary, in this case the building contract.

(4) The interpretation of the building contract must be undertaken in accordance with conventional principles relating to the construction of contracts in writing. These include a need to examine the role of the security provision in the context of the whole of the contract and the usual requirement that a commercial contract be interpreted in a way which gives due weight to the commercial objectives of the parties as they appear from the document.

(5) On an application for interlocutory orders, I might grant relief where there is a seriously arguable issue and where the balance of convenience indicates that the relief sought is appropriate.

The Facts

For my present purposes, the facts may be shortly stated. I am able to do this because my present function is to identify the areas of dispute, not to resolve them.

The building contract was executed on 15 January 2002. As will appear, clause 5.2 of the general conditions provides that the Contractor shall provide security and that this be provided otherwise than by retention money.[5] Item 13 of the annexure to the general conditions provides that the amount of security is to be an amount equal to five percent of the contract sum, that is, $419,000. This security is to be released as to one half upon practical completion[6] and as to the balance upon final completion[7]. Accordingly, the Contractor provided the two bank bonds, each to the amount of one half of this security, valid until 10 December 2002 and 10 January 2004, respectively.

It seems that the work proceeded for some months during which 12 progress claims were made. In early July 2002 the correspondence shows that there had arisen a dispute between the Contractor and the Principal about the scope of works included in the building contract. In particular, the Principal contended and the Contractor denied that the tenancy areas were part of these works.

There is mention in the correspondence too, of the fact that on 17 July 2002 the Contractor gave a notice of dispute pursuant to cl. 47.1. This is the first step to the referral of the dispute to arbitration, but the subject matter of this dispute is not identified. By 2 August 2002 the dispute had blossomed somewhat. On that date the Principal gave to the Contractor a notice to show cause why it should not exercise its rights under cl. 44.4 to take the work out of the hands of the Contractor or to terminate the building contract. Such a notice might, pursuant to cl. 44.2, be given where the Contractor had committed substantial breaches of the building contract. The breaches specified in the notice concern the scope of works issue, in the sense that it is said that the Contractor exhibited an intention not to carry out the tenancy works. It also alleges that the Contractor lodged progress claims which were not supported by evidence, that the Contractor failed to provide proper "for construction documents", and that the Contractor had failed to remedy non-compliant work. On the same day the Principal gave its own notice of dispute pursuant to cl. 47.1. The disputes were those set out in its notice to show cause.

On 9 August 2002, the solicitors for the Contractor wrote a letter responding to the notice to show cause. This letter joins issue with a number of the complaints of the Principal and asserts that the notice was invalid.

On 29 August 2002, the Principal gave a second notice to show cause alleging similar substantial breaches. The response of the Contractor is by solicitors' letter dated 9 September 2002.

Six weeks then passed during which the parties met in an attempt to resolve their differences and, perhaps, the work continued, for a further five progress claims were submitted. Then, the Principal on 22 October wrote to the Contractor asserting that it had failed to show cause and electing to determine the building contract pursuant to cl. 44.4(b). Alternatively, it treated the matters alleged in the notice to show cause notices as repudiatory conduct which it accepted as terminating the building contract at common law. The Principal then directed the Contractor to leave the site.

The response of the Contractor by its solicitors' letter of 23 October 2002 was to treat the Principal's letter of 22 October as a repudiation which it thereby accepted.

As at 22 October 2002 or 23 October 2002, therefore, the building contract was at an end. The rights of the parties as a consequence fall to be determined upon the resolution of the factual controversies and upon the application to these of the terms of the building contract or common law principles.

On 21 November 2002, the Principal wrote to the Contractor advising that, pursuant to cl. 5.6, it intended to convert the bank bonds into cash to partly compensate for the losses incurred as described in the attached schedule. The schedule sets out the plaintiff's "draft interim claim" for $697,747. This is made up of the contract price of $8.38M less progress payments certified and assessed, giving a residual contract balance of $2,504,577. From this, the Principal deducted four items which are as follows:

This produced the balance of nearly $700,000 due to the Principal. This letter provoked a protest from the solicitors for the Contractor and a further notice of dispute dated 22 November in which the Contractor asserted common law repudiation by the Principal and claimed damages in the sum of $2,505,458.02.

The Contractor's writ was filed on 3 December 2002 seeking orders to protect the security. As I have mentioned, it is not for me at this stage to express a view as to the rights and wrongs of these disputes; it is sufficient to note the existence and nature of them and to find, as I do, that I cannot dismiss the allegations of the Principal out of hand as being specious, fanciful or not bona fide. The question for me is whether, in these circumstances, the terms of the building contract prohibit the Principal from taking steps with respect to the security.

The building contract is based on Standards Australia general conditions AS4300-1995. The relevant provisions with respect to the Contractor's security are found in section 5:

5.1 Purpose Security, retention moneys and performance undertakings are for the purpose of ensuring the due and proper performance of the Contract. 5.2 Provision of Security If it is provided in Annexure Part A that a party shall provide security then the party shall provide security in the amount stated in Annexure Part A and in accordance with Clause 5. 5.2A Further Security ... 5.3 Form of Security The security shall be in the form of cash, bonds or inscribed stock issued by the Australian Government or the Government of a State or Territory of Australia, interest bearing deposit in a trading bank carrying on business in Australia, an approved unconditional undertaking given by an approved financial institution or insurance company, or other form approved by the party having the benefit of the security. The party having the benefit of the security shall have a discretion to approve or 15 (sic) disapprove of the form of an unconditional undertaking and the financial institution or insurance company given by it or other form of security offered. The unconditional undertaking in the form of Annexure Part C is approved. If the security is not transferable by delivery, it shall be accompanied by an executed transfer or such other documentation as is necessary to effect a transfer of the security. The costs (including all stamp duty or other taxes) of and incidental to the transfer and retransfer, shall be borne by, the party providing the security. 5.4 Time for Provision of Security Security shall be provided within 28 days of the Date of the Contract. 5.5 Retention Moneys ... 5.6 Conversion of Security and Recourse to Retention Moneys A party may have recourse to security, retention moneys or both and may convert into money security that does not consist of money where- (a) the party has become entitled to exercise a right under the Contract in respect of the security, retention moneys or both; (b) the party has given the other party notice in writing, for the period stated in Annexure Part A or, if no period is stated, 5 days, of the party's intention to have recourse to the security, retention moneys or both; and (c) the period stated in Annexure Part A or, if no period is stated, 5 days, has or have elapsed since the notice was given. 5.7 Substitution of Security for Retention Moneys The Contractor shall be at liberty at any time to provide in lieu of retention moneys security in any of the forms permitted in Clause 5.3. To the extent that such security is provided, the Principal shall not deduct retention moneys and shall forthwith release retention moneys. 5.8 *Reduction of Security and Retention Moneys Upon the issue of the Certificate of Practical Completion, the Principal's entitlement to security and retention moneys shall be reduced to the percentage thereof stated in Annexure Part A or, if no percentage is stated, to 50 per cent thereof. If at any time after Practical Completion the Superintendent is of the opinion that it is reasonable to further reduce the Principal's entitlement to security and retention moneys, that entitlement shall be reduced to the amount which the Superintendent determines to be reasonable. The Principal shall release security and retention moneys in excess of the entitlement within 14 days of the entitlement being so reduced. 5.9 *Release of Security and Retention Moneys If the Contractor has provided security, retention moneys or both, then the Principal shall release them when required by Clause 42.6. If the Contractor has provided additional security for any item of unfixed plant and materials pursuant to Clause 42.2, the Principal shall release that additional security within 14 days of the incorporation into the Works of the unfixed plant or materials. If the Principal has provided security, then, when the Contractor has been paid all moneys finally due to the Contractor on any account whatsoever (whether in connection with the Contract or otherwise) the Contractor shall release the security provided by the Principal. 5.10 Holding of and Interest on Cash Security and Retention Moneys Alternative 1 A party holding cash security, retention moneys or both shall forthwith deposit the moneys in an interest bearing account in a bank. That party shall nominate the bank and the type of account. The account shall be in the joint names of the Principal and the Contractor and shall be one from which moneys can only be drawn with the signatures of two persons, one appointed by each of the Principal and the Contractor. The moneys shall be held until the Principal or the Contractor is entitled to receive them. Interest earned on cash security provided by the Contractor and on retention moneys belongs to the Contractor. Interest earned on cash security provided by the Principal belongs to the Principal. Upon a party becoming entitled to receive any, moneys, including interest in the account the other party shall forthwith have that other party's appointee sign all documentation necessary to withdraw the moneys and shall promptly give the signed documentation to the party entitled to receive such moneys."

I make the four general observations about these provisions:

(a) The terms of these clauses follow those appearing in Standards Australia contract AS2124-1992 other than the inserted cll. 5.2A and 5.7. The insertion of the latter clause in the present building contract has the consequence that the succeeding clauses have a numbering which differs from their equivalents in AS2124-1992.

(b) The purpose of the provision of security is to ensure the due and proper performance by the Contractor of the building contract.

(c) Section 5 contemplates a number of different kinds of security:

(i) Retention money deducted from progress payments. This is treated differently from other forms of security and may not be properly called security in the terms used in the building contract. Item 15 of the annexure shows that the intention of the parties was that no security be provided in the form of retention money.

(ii) Security, properly so called in terms of the building contract, may take any of a number of forms -

* cash

* bonds or inscribed stock

* interest bearing deposit in an Australian bank

* an approved unconditional undertaking given by an approved financial institution

Two things should be noted about this security. First, that cash may be provided, not as retention money, but as security, properly so called. Second, bank bonds are just one of the forms of security contemplated by cl. 5.3. Any consideration of the construction of section 5 and the role it plays in the building contract must have regard to the possibility that other forms of security may be provided.

(d) Notwithstanding its misleading heading, cl. 5.6, with which this case is concerned, deals with two matters: the conversion of non-cash security into money and recourse to retention money, security or both. These steps may be taken only where three preconditions have been satisfied. In this sense, the right of the Principal to convert the non-cash security into money and to have recourse to it is not unfettered. The second and third preconditions have clearly been satisfied in this case. The first precondition is that the Principal "has become entitled to exercise a right under the Contract in respect of the security, retention moneys or both". It is only an entitlement to exercise this particular right under the building contract that triggers the right of access to the security, in this case to call upon the bank bonds.

What rights, therefore, are conferred by the building contract "in respect of the security, retention moneys or both"? These are to be found only in the following clauses:

"42.8 Set Offs by the Principal The Principal may deduct from moneys due to the Contractor any money due from the Contractor to the Principal otherwise than under the Contract and if those moneys are insufficient, the Principal may, subject to Clause 5.6, have recourse to retention moneys and, if they are insufficient, then to security under the Contract. 42.9 Recourse for Unpaid Moneys Where, within the time provided by the Contract, a party fails to pay the other party an amount due and payable under the Contract, the other party may, subject to Clause 5.6, have recourse to retention moneys, if any, and, if those moneys are insufficient, then to security under the Contract and any deficiency remaining may be recovered by the other party as a debt due and payable.[8]"

In this case, the amount claimed in the Principal's draft interim claim appears to be the loss suffered by reason of its lawful termination of the building contract. It may be that its cost to complete includes a component for rectification work, but its entitlement to this cannot arise under the building contract because the procedures under cl. 30.3 were not complied with prior to termination.

The first basis of termination by the Principal is pursuant to cl. 44.4(b). In such a case the rights of the parties fall to be adjusted pursuant to cl. 44.10:

"44.10 Rights of the Parties on Termination If the Contract is terminated pursuant to Clause 44.4(b) or 44.9, the rights and liabilities of the parties shall be the same as they would have been at common law had the defaulting party repudiated the Contract and the other party elected to treat the Contract as at an end and recover damages."

Broadly speaking, then, if the Principal terminated the building contract pursuant to cl. 44.4(b), its rights are to payment of a sum equal to common law damages. Again speaking broadly, this would represent the cost to perform the whole work, including the sums paid to the Contractor less the contract price. There may also be an entitlement to damages for consequential loss. This is more or less what is asserted in the Principal's draft interim claim. This is the sum which is or may be due under the building contract. Clause 42.9, however, does not provide machinery for determining the amount of this sum, nor when it is to be paid. The evident intent of the clause is that the sum should be determined by arbitration pursuant to cl. 47 in default of agreement and paid forthwith in either event.

Clause 42.9, however, does not give to the Principal an immediate unqualified right in respect of the security, as is contemplated by cl. 5.6(a). This right arises only where -

(a) the amount is due and payable under the building contract;

(b) there has been a failure to pay that amount within the time provided by the building contract; and

(c) the requirements of cl. 5.6 have been satisfied.

It is evident that these preconditions (a) and (b) have not been satisfied. Accordingly, as a matter of construction, the Principal is not now entitled to exercise rights in respect of the security conferred by cl. 42.9.

The Principal's alternative position is that the Contractor has repudiated the building contract so that the Principal has determined it at common law. Its entitlement might then be said to arise otherwise than under the building contract in terms of cl. 42.8.[9] In such an event, the Principal may have recourse to the security to recover "money due" from the Contractor to the Principal. As a matter of terminology, it is difficult to characterise as "money due" a sum which is asserted by a party in dispute to be owing by its adversary in a draft interim claim without substantiation and without detail and, of course, without any determination by adjudication, arbitration or otherwise.

If the matter were free of authority I would have little difficulty in concluding that the case is not so free of doubt to warrant the refusal of the interlocutory relief sought.

The matter is, however, not altogether free of authority. I have been referred to a large number of cases including recent decisions of the Court of Appeal of this State[10]. Of these decisions, the closest in point of fact is that in the Bachmann case. In this case the form of contract, AS 3556-1988, contained the following cl. 5.5 which resembled cl. 5.6 in the present building contract.

"5.5 A party shall not convert into money security that does not consist of money until the party becomes entitled to exercise a right under the Contract in respect of the security. The party shall not be liable for any loss occasioned by conversion pursuant to the Contract."

In the Court of Appeal, Brooking JA, delivering the leading judgment with which Tadgell and Ormiston JJA concurred, observed that it was a peculiarity of the case that the security provided was an unconditional letter of credit issued by a bank. After considering the cases which treated with great respect the entitlement of the beneficiary in such case to have recourse to that security, his Honour referred to many of the cases dealing with the altogether different question of the rights of the beneficiary against the grantor. As to this question, his Honour concluded as follows:

"In the present case the matters of conversion of and recourse to the security, are dealt with by two general conditions, which should if possible be construed so as to work in harmony. Clause 5.5 prohibits conversion into money until the purchaser becomes entitled to exercise a right under the contract in respect of the security. Clause 22.4 entitles the purchaser to deduct from moneys otherwise due to the supplier any moneys due from the supplier to the purchaser and, if those moneys are insufficient, entitles the purchaser to have recourse to the security. Like cl. 3.13(b) in Fletcher, it confers a right of recourse against the security to obtain the balance if the exercise of the right of set-off which it also confers leaves a balance outstanding in favour of the purchaser. It would, as Charles J.A. said in Fletcher¸ be strange if the clauses concerned in that case and this - cl. 3.13(b) and cl. 22.4 - conferred the practical right of recourse only where moneys were `due' from the supplier to the purchaser in some such sense as actually or indisputably due. I would treat cll. 5.5 and 22.4 of the present contract, read in conjunction, as entitling the purchaser, as between itself and the supplier, to have recourse to the security where according to a bona fide claim made by the purchaser moneys are due to it from the supplier which exceed any moneys due from it to the supplier."

Not surprisingly, counsel for the plaintiff pressed me with the submission that I should apply the same reasoning and reach the same result in this case. Accepting, as I do, that I am bound by this decision, there are to my mind dangers in giving the same construction to the same words where they are found in two very different contracts.

It is necessary to bear in mind that the contract with which I am concerned is the 1995 version of a series of standard form contracts produced by Standards Australia over a quarter of a century. Each of them confers on the Principal rights with respect to a security "if the Principal becomes entitled to exercise all or any of its rights under the contract in respect of the security". There have been, to my knowledge, revisions of the original 1978 form of contract in 1981, 1986, 1992 and 1995. The contract in the Bachmann case was relevantly that in the 1986 revision. It may be supposed that in preparing each revision the drafting committee was aware of the state of judicial authorities with respect to the construction of the existing version then under consideration. The 1995 revision with which I am concerned is relevantly the same as that drafted in 1992. None of the Court of Appeal decisions to which I was referred was decided earlier than 1996 so that the drafters of the general conditions adopted in the present building contract did not have the benefit of its observations. In the 1998 revision, published after the decisions of the Court of Appeal in the ADI case and the Fletcher Construction case, the drafting committee adopted an entirely different approach.

Even so, the 1992 version and the similar 1995 version represented a significant development over that which had gone before. I mention only some of these developments. First, in the pre-1992 versions[11] the effect of cl. 5.5[12] was only to enable the Principal to convert into money the non-cash security. It says nothing of cash security or of retention money which, of course, do not admit such a conversion. It is cl. 5.9 which stipulates that, when the security had been so converted or where the security is a cash security or retention moneys, it must be held in an interest bearing account. The moneys are to be held in this account "in trust until the Principal or the Contractor is entitled to receive them".[13]

Brooking JA, in the passage from the Bachmann case which I have quoted, places some emphasis upon the reasoning of the Court of Appeal in the Fletcher Construction case. This case involved the construction of a contract very different from the present; it contained no comparable qualification upon the right to convert or to have recourse to the non-cash security. It does not appear to be a Standards Australia form of contract or, indeed, any of the standard forms then in use. Clause 3.13 in that case permitted the Principal to have recourse to the security where the Contractor was obliged to pay liquidated damages for late completion and where it failed to do so. In these circumstances, it is, with respect, scarcely surprising that counsel for the Contractor was unable to persuade the court to infer in the contract a term which enabled the Contractor to prevent the Principal from converting the security into money so as to give effect to cl. 3.13.

The 1986 version of AS2124 required the matter to be approached in two steps: the Principal may convert the non-cash security into money where cl. 5.5 operates and it may have recourse to that cash where cl. 5.9 permitted.[14]

The 1992 revision, including the present building contract, deals with this matter differently. First, cl. 5.5[15] permits the Principal both to convert the non-cash security into money and to have recourse to this money where it has become entitled to exercise a right under that contract with respect to the security. This right to act against the security does not depend upon the Principal being entitled to receive the proceeds of the security as was the case under the earlier cl. 5.9. Associated with this is the removal in this 1992 revision of the obligation on the Principal to pay the proceeds of the converted security into a trust account. Presumably, the proceeds would immediately become part of the Principal's working capital for it to use for its own purposes as it sees fit. In the event of the insolvency of the Principal, these funds may be lost notwithstanding that it should later appear that the Principal's claim, albeit bona fide and not specious or fanciful, should fail.

Second, cl. 5.5 of the 1992 version[16] creates for the first time a procedure whereby the Principal must give notice before converting the non-cash security into money or having recourse to it. As the Standards Australia commentary on the AS2124-1992 form points out, this is evidently directed to giving to the grantor the right to approach the court for relief where it disputes the beneficiary's right to act under cl. 5.5. Such a right would be illusory if the grantor could obtain relief only where the entitlement to exercise the right in respect of the security were construed to depend only upon a claim for the payment of money, and one which is bona fide and not specious or fanciful.

Third, cll. 42.10 and 42.11 of the 1992 version[17] which trigger the operation of cl. 5.5 also represent a substantial departure from the equivalent provisions in preceding versions of the contract. In the 1986 version, cl. 42.10 permits the Principal to deduct from moneys otherwise due to the Contractor any money due from the Contractor to the Principal and, if necessary, to have recourse to the security provided under the contract. This provision draws no distinction between money due from the Contractor under the contract and money due for some other reason.

In the post-1986 versions, the availability of the security arises in one clause where money is due and payable under the contract[18] and in another where money is due otherwise than under the contract[19]. It may be thought surprising that, for this purpose, money would be considered due from some extraneous relationship where the Principal merely asserts a claim to payment notwithstanding that the assertion is made bona fide and is not specious or fanciful. Again the role of such ex-contract indebtedness under the 1986 version differs from that in the 1992 version. In the 1986 version the indebtedness may permit the Principal to convert the non-cash security under cl. 5.5 but the Principal may draw moneys from the trust only where it is "entitled to receive them".

In the 1992 version, cl. 42.10 confers the right of set off only where money is due from the Contractor outside the contract and provides access to the security where necessary. Clause 42.11 read in conjunction with cl. 42.1[20] appears to deny to the Principal the right of set off since money due and payable will ordinarily have been subject to the certification procedures of cl. 42.1. In these circumstances, the contract itself provides an authoritative statement of liability, subject always to review pursuant to cl. 47.

Fourth, there is a further change in terminology in cl. 5.5 of the 1992 version which has found its way into cl. 5.6 of the present building contract. Unlike its equivalent predecessor, the precondition in question to the right to convert the non-cash security into money and to have recourse to the proceeds is that the Principal "has become entitled..." This is to be contrasted with the expression "becomes entitled" which is used in the preceding versions. This change in tense indicates that some determination of entitlement is required, whether by certificate, agreement, arbitral award or otherwise.

It will be seen from this brief review that the role of cl. 5.5 in the 1992 version and that of the equivalent cl. 5.6 in the present building contract is rather different from that in cll. 5.5 and 5.9 in the 1986 version which was under consideration in the Bachmann case. Indeed, the differences are so great that it would, in my view, not be appropriate to assume that the words "entitlement" in each document should necessarily bear the same meaning.

The facts underlying the present application demonstrate the dangers of too readily concluding that the rights conferred by cl. 5.6 to convert non-cash security and to have recourse to the proceeds should depend upon the mere assertion by a disputing party of a right to payment of a sum of money. It is necessary also to bear constantly in mind that the right which triggers the operation of cl. 5.6 is not a right to payment but rather a right under the contract in respect of the security. It is clear from an examination of cl. 42.9 that this right, if it arises as a consequence of an amount becoming due and payable under the building contract, does not arise until further preconditions have been satisfied. It would be anomalous if the cl. 5.6 right which arises in consequence of an ex-contract indebtedness should be less circumscribed. Moreover, as a matter of ordinary English usage, I have great difficulty in characterising as "moneys due" the case where a party in dispute merely asserts an indebtedness without detail or substantiation of any kind.

The drafters of the 1992 version of the Standards Australia contract and of the building contract presently under consideration have demonstrated a great care that the grantor of the security, the Contractor, should not be disadvantaged by inappropriate action against the security by a party in dispute. The evident reason for this is that the maintenance of the security is in effect no disadvantage to either disputant; it simply means that there is a secure fund available to satisfy the Principal's claim when, in due course, it is shown to be well-founded. The exercise by the Principal of rights under cl. 5.6 in the case where no money is later found to be owed to it risks imposing a grave disadvantage upon the Contractor. In the circumstances, I construe the present building contract to oblige the Principal, which wishes to exercise rights under cl. 5.6 as a consequence of an ex-contract liability, to demonstrate that this liability in fact exists. This it may do by agreement or by some authoritative determination whether by judicial order or arbitral award. Until this has been achieved the purpose for the granting of the security expressed in cl. 5.1 is sufficiently achieved by requiring that the security remain in place.

I remind myself that this is an interlocutory application. I am satisfied that, in the circumstances disclosed by the evidence, there is a seriously arguable issue that the Principal is not entitled to act under cl. 5.6. Moreover, if the bank bonds are maintained, the balance of convenience strongly favours the granting of the injunction sought.

The Contractor in the present case offers the usual undertaking as to damages and an undertaking to maintain the bank bonds so long as the liability of the Principal remains unresolved. Upon the giving of these undertakings I will grant the relief sought. I will hear counsel further as to the precise terms of the orders required to give effect to this conclusion.

[1] The general conditions were modified in certain respects which are immaterial for my purposes.

[2] Olex Focas Pty Ltd v Skodaexport Co Ltd [1998] 3 VR 380 at 395, per Batt J.

[3] Wood Hall Ltd v The Pipeline Authority [1979] HCA 21; (1979) 141 CLR 443 at 459, per Stephen J.

[4] Anaconda Operations Pty Ltd v Flour Daniel Pty Ltd (1999) 16 BCL 230 at 234 [15], per Brooking JA.

[8] These clauses are respectively cl. 42.10 and 42.11 in AS2124-1992.

[9] I express no view as to the correctness of this point which was not argued before me. It may that the right to damages does arise under the building contract, for this right exists as a consequence of a breach of that contract.

[10] ADI Ltd v State Electricity Commission of Victoria (unreported, 12 August 1997); Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812 (decided in 1997); Bachmann Pty Ltd v BHP Power New Zealand Ltd [1998] VSCA 40; [1999] 1 VR 420 (decided in 1998); Anaconda Operations Pty Ltd v Fluor Daniel Pty Ltd (1999) 16 BCL 230.

[11] Including that under consideration in the Bachmann case.

[12] The predecessor of cl. 5.5 in AS2124-1992 and of cl. 5.6 in the present building contract.

[13] A fact which is noted by Brooking JA in the Bachmann case at [12].

[15] Clause 5.6 in the present building contract.

[16] Clause 5.6 in the present building contract.

[17] Clauses 42.8 and cl. 42.9 in the present building contract.

[18] Clause 42.11 which is reproduced as cl. 42.9 in the present building contract.

[19] Clause 42.10 which is reproduced as cl. 42.8 in the present building contract.

[20] Which is not in terms identical to cl. 42.1 in the present building contract.

At a glance

Court

Decision date

Before

Source

Judgment (70 paragraphs)

Parties

Cases Cited (1)