Vos Construction & Joinery Qld P/L v Sanctuary Properties P/L & Anor

[1] Douglas J: This is an application to restrain the respondents from drawing down a bank guarantee held under a construction contract or, alternatively, for the payment of the sum into court.

[2] The respondents were joint venturers who entered into a contract with the applicant in August 2005 for the performance of building work. The contract price was $7,010,606 and the date for practical completion was 29 November 2005. That date was adjusted to 17 January 2006 by the architect who administered the contract. The respondents notified the applicant of their intention to claim liquidated damages for delay on 13 February 2006. The date of practical completion was 21 March 2006. The architect issued his final certificate on 8 June 2007 and the applicant, through its solicitors, gave a notice of dispute in relation to the final certificate dated 12 June 2007. Clause A8 of the contract allowed a contractor which wished to dispute an architect's certificate to give the architect written notice within 20 working days after receiving the certificate. Clause A8.3 then required the architect to assess such a dispute notice and give a written decision to the contractor and the owner within 10 working days.

[3] The applicant's solicitors, also on 12 June 2007, in a facsimile to the respondents' solicitors asserted that the fact that their client had now disputed the respondents' rights under cl. A8 meant that the respondents had no contractual right to draw upon the applicant's security which had been lodged in the form of a bank guarantee.

[4] On 25 June 2007 the architect, rejecting the applicant's submissions, concluded that his final certificate should stand as issued. On the same date the respondents' joint venture gave notice of an intention to draw on the security to pay the outstanding certificate issued by the architect in the sum of $173,800 being $165,000 for liquidated damages for delay and $8,800 as a sum paid to an electrical subcontractor in relation to an insurance claim. It gave that notice purportedly in reliance on cll. C5 and C6 of the contract and pursuant to s. 67J of the Queensland Building Services Authority Act 1991. The respondents have made a written demand on the bank that provided the guarantee but gave undertakings to preserve the position pending the determination of this application for interlocutory relief by the applicants.

[5] Clauses C5 and C6 had been amended during the currency of the contract and the parties agreed that they and cl. C9 were in the following form relevantly for the purposes of this application.

1 Subject to clause C6, the owner may draw on the security provided by the contractor under clause C1 if:

• a certificate issued by the architect in favour of the owner under any of clause N4, N11 or Q17 is not paid by the contractor within the period shown in item 4 of schedule 1 or

• the contractors engagement is terminated by the owner under clause Q1 or Q2 and the architect has issued a certificate under clause Q9

and the contractor has not disputed the owner's rights under clause A8.

2 The owner may not draw on security in the form of *unconditional guarantees under clause C1 or otherwise unless the owner has given the contractor:

• Written notice ("the first notice") to the contractor, within 28 days after the owner becomes aware, or ought reasonably to have become aware, of its right under clause C5.1, advising of the proposed use and, if the amount due can be quantified when the first notice is given, of the amount due; and

• If the amount due cannot be quantified when the first notice is given, a further notice ("the second notice") to the contractor within three business days after the owner becomes able to quantify the amount due, advising of the amount due.

1 To draw on the security where a certificate in favour of the owner has not been paid by the contractor by the end of the period shown in item 4 of schedule 1, the owner must notify the contractor and the architect in writing within 28 days of the basis and extent of its entitlement and that it intends to draw on the security to the extent of the debt owed by the contractor to the owner. Where the security is in the form of *unconditional guarantees notice under this clause may be included in the first or second notice.

2 If the security is cash retention, the owner may then draw on the case retention to the extent of its entitlement.

3 If the security is *unconditional guarantees, the owner must give to the security provider a written demand for payment to the extent that the amount of the security is able to satisfy the owner's entitlement.

.3 If the security is *unconditional guarantee(s) and the certificate is in favour of the contractor the owner must give to the contractor the remaining guarantees within the time shown in item 4 of schedule 1. If the certificate is in favour of the owner, the owner may draw on the security under clause C5, and the certificate is evidence of the basis and extent of the owner's entitlement under clause C5."

[6] Clause C5 subclause 1 concludes with the words I have emphasised: "and the contractor has not disputed the owners rights under clause A8." It is those words that are central to the applicant's first argument. The argument is that, since the applicant disputed the respondents' rights with the architect, even though unsuccessfully, the respondents had no right to draw on the security. The applicant also argues that the respondents have not given notice in a timely way pursuant to s. 67J of the Queensland Building Services Authority Act.

[7] It is convenient to begin, however, with a consideration of the way the law treats such securities as these.

[8] The respondents rely upon what has been described as the principal of autonomy, namely that the financier's obligation in commercial instruments of this nature, such as documentary letters of credit, standby letters of credit and various kinds of demand guarantee including performance bonds, is independent of the underlying contract so that with limited exceptions the courts do not interfere with the performance of the payment obligation; see Boral Formwork & Scaffolding Pty Ltd v Action Makers Ltd [2003] NSWSC 713 at [32] per Austin J. Traditionally bank guarantees of this nature in this context are acceptable on the basis that they are "as good as cash" in the eyes of those to whom they are issued; see Wood Hall Ltd v Pipeline Authority [1979] HCA 21; (1979) 141 CLR 443, 457 per Stephen J.

[9] One of the recognised exceptions to the ability to call immediately on payment pursuant to such a guarantee is that, if there is a breach of a negative stipulation in the underlying contract which conditions the right to call up the guarantee, an injunction may issue to restrain that breach; see, e.g. Austrak Pty Ltd v John Holland Pty Ltd [2006] QSC 103 at [10].

The effect of unsuccessfully disputing the owner's rights to payment

[10] The breach of a negative stipulation asserted here is the attempt to draw on the security although the applicant has disputed the respondents' rights under cl. A8 of the contract. When one examines the relevant clauses of the contract to which I have referred, however, it seems evident to me that the mere fact that a contractor has disputed the owner's rights under cl. A8 should not be enough to prevent the owner from drawing on the security. As Mr Beacham submitted for the respondent, this would give a notice of dispute the effect of permanently suspending the respondents' right to have recourse to the guarantee and allow the avoidance of recourse to it by the giving of further notices of dispute every time a certificate issued in the respondents' favour.

[11] In my view the obvious commercial purpose or business common sense of the proviso in cl. C5 1 was to prevent recourse to the security where the contractor has disputed the owner's rights under cl. A8 successfully, so as to negate the effect of the earlier certificate. The role played by the architect in issuing a certificate is clearly one of assisting to determine in a preliminary and speedy fashion the circumstances in which access to the money secured by the bank guarantee may occur. If that process could be stopped by any notice unsuccessfully disputing the architect's certificate there would be no point to the clause. As to the role of business common sense in the construction of contracts, see the well known statement of Lord Diplock in Antios Compania Naviera SA v Salen Rederierna AB [1985] AC 191, 201 that : "if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense."

[12] The applicant also relied upon cl. P1 of the contract which provided that:

"If a dispute or difference arises out of or in relation to this contract, the parties must continue to perform their obligations under this contract."

[13] The argument was that, if the applicant disputed the "owner's rights" under cl. A8 for the purposes of cl. C5, even if the dispute was determined against the applicant, then cl. P1 arguably had the effect that the respondent should pursue the dispute resolution procedure outlined in section P of the contract or bring other civil proceedings.

[14] Clause P1 is not referred to in cl. C5 whose purpose seems to me to be to provide a right to draw on the security when the architect's certificate remains unpaid and still on foot because it has not been disputed successfully under cl. A8. To adapt the approach of Charles JA in Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812, 821-822, cl. C5 gives a right of access to the security by a relatively simple procedure under which the architect is to certify whether money is owing and not paid and where the contractor has not disputed the owner's rights successfully with the architect. Otherwise it would deprive that right of access to the security of much of its intended purpose if it only existed where the contractor disputed the owner's rights with the architect whether successfully or not; see also Callaway JA at 826.

[15] Similarly in Bachmann Pty Ltd v BHP Power New Zealand Pty Ltd [1998] VSCA 40; [1999] 1 VR 420, Brooking JA, giving the judgment of the Court of Appeal, commenced his reasons at 421 with the pregnant words: "Again we find the contractor or supplier under a building or engineering contract trying to stop the owner demanding payment under a security given by a financial institution". His Honour went on to say at 436-437, [50]-[53], having referred to the discussion by Charles and Callaway JJA in Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd, of the allocation of risk effected by such provisions pending a final resolution of a dispute, that it would be strange if clauses of this type conferred a practical right of recourse only where moneys were actually or indisputably due. That approach also suggests that reliance on cl. P1 to suggest that the matter should now proceed to final resolution of the dispute between the parties misconceives the role that clauses such as cl. A8 and cl. C5 have in contracts of this type.

[16] The applicant had also given notice under cl. P2 of the contract which requires a compulsory conference in which the parties make a bona fide attempt to resolve their dispute but that does not seem to me to be relevant to the issue of the owner's right to draw on the security.

Section 67J of the Queensland Building Services Authority Act

[17] The applicant also relied upon s. 67J of the Queensland Building Services Authority Act which provides as follows:

(1) The contracting party for a building contract may use a

security or retention amount, in whole or in part, to obtain an

amount owed under the contract, only if the contracting party

has given notice in writing to the contracted party advising of

(2) The notice must be given within 28 days after the contracting

party becomes aware, or ought reasonably to have become

aware, of the contracting party's right to obtain the amount

(3) If, because of subsections (1) and (2), the contracting party is

stopped from using a security or retention amount, the

contracting party for the contract is not stopped from

(4) This section does not apply if, under the contract -

(a) work has been taken out of the hands of the contracted

(b) the security or retention amount is to be used to make a

payment into court to satisfy a notice of claim of charge

amount owed, under a building contract, means an amount

that, under the contract, is a debt due from the contracted

party for the contract to the contracting party for the contract

because of circumstances associated with the contracted

use of security or retention amount includes the act of

converting securities into cash where the securities are held as

[18] The argument was that the respondents became aware of their right to obtain the amount owed when the date of practical completion was fixed as 21 March 2006. They also notified an intention to claim liquidated damages on 13 February 2007. The applicant therefore argues that the claimed right to liquidated damages accrued at the latest on 13 February 2007 and that the notice purportedly made under s. 67J on 25 June 2007 was out of time because it was not given within 28 days after the contracting party became aware or ought reasonably to have become aware of its right to obtain the amount owed. In developing that argument, the applicant relied on the dictum of Keane JA in Multiplex Ltd v Qantas Airways Ltd [2006] QCA 337 at [34] that "the 28 days referred in s. 67J(2) does not begin to run until a time after the right of the owner to recover some amount from the builder has actually accrued."

[19] His Honour's comments were contained in the following passage:

"[34] The appellant's second argument involved reading s 67J(2) as requiring a first notice to be given within 28 days from the date when Qantas became aware that Multiplex would inevitably become obliged to pay liquidated damages. That argument draws little support from the language of s 67J(2) of the Act; which speaks of the owner's awareness of its 'right to obtain the amount owed', not of its 'potential right' or its 'right in the future to obtain the amount owed'. The 28 days referred to in s 67J(2) does not begin to run until a time after the right of the owner to recover some amount from the builder has actually accrued.

[35] Moreover, s 67J is concerned with a wide variety of circumstances in which an amount may become owing by the builder to the owner. In the particular case of liquidated damages, the quantification of the amount owed is effected by the contract itself, so that the amount owed is quantified by the contract as and when the right to obtain that amount arises. So far as liquidated damages are concerned, it may be that a second notice under s 67J(3) is not required to be given."

[20] The respondents answer to this argument is that it could not "obtain" the amount before the architect issued the final certificate on 8 June 2007 and Keane JA's highlighting of the distinction between the "right to obtain the amount owed" and the "right in the future to obtain the amount owed" supports that approach.

[21] The respondents' arguments seem persuasive to me. Even if they had a contractual right to payment of liquidated damages constituting a debt at the time of practical completion it did not become payable until the architect's final certificate was issued. It was at that stage that the respondents became aware that they could "obtain" payment. It may be characterised as an example of a present debt payable in the future, on the issue of the architect's certificate; see, e.g., Re Australian and New Zealand Savings Bank [1972] VicRp 79; [1972] VR 690, 692.

[22] In the alternative, the respondents argued that a failure to comply with the time limit under s. 67J(2) does not bar recourse to the security if the notice is in fact given. They relied on the approach adopted in Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; (1998) 194 CLR 355, 390-391 at [93] of examining whether any breach of a statutory provision should lead to invalidity of the step purportedly taken pursuant to the statute. Here, even if the respondents' right to obtain the amount owed accrued earlier than the architect's final certificate, they had given notice of the intention to resort to the guarantee for the liquidated damages sum on 3 April 2006, well within 28 days from the date of practical completion of 21 March 2006. In those circumstances it would seem odd that s. 67J(2) should have the effect of invalidating their right to resort to the security.

[23] Principally, however, it seems to me that the respondents' right to obtain the amount owed to them by drawing on the security did not accrue, under this contract, until the architect's final certificate issued confirming the rejection of the applicant's dispute. Until that occurred the respondents could not have been aware of their right to obtain the amount owed under the contract even if the fact that it was likely to be owed in the future was known for some time before the architect's certificate.

[24] The submission for the applicant was that it would suffer embarrassment and irreparable loss of reputation within the construction industry if it became known that its security had been drawn down and that the proceeds of the security were with the respondents. The applicant has not previously had a security drawn down under any of its other contracts.

[25] Considerations such as those influenced Mackenzie J to grant an injunction in Sudholz Pty Ltd v Airlie Summit Pty Ltd [2007] QSC 199 at [18]- [20]. In my view, however, the arguments relied upon by the applicant to establish that there is a serious question to be tried depend upon questions of construction which seem to me to be clearly against the applicant and which do not depend on disputed factual matters.

[26] In Sudholz Pty Ltd v Airlie Summit Pty Ltd there was a factual dispute about which party had terminated a contract. That was relevant because recourse to the security was available only to that party. The application proceeded on the basis that there was evidence going to the issue of default from both sides so that it was impossible and unnecessary to determine that issue on the application before his Honour; see at [6]-[8].

[27] Here the questions of construction argued by the applicant do not require the resolution of disputed questions of fact and should be decided against it. The circumstances otherwise do not seem to me to justify the grant of an interlocutory injunction.

[28] Accordingly the application is dismissed. I shall hear the parties as to costs.