Posts

Injunctions and bank guarantees: When can a contractor prevent a developer having recourse to bank guarantees or performance bonds?

Case: Uber Builders and Developers Pty Ltd v MIFA Pty Ltd [2020] VSC 596

One feature of construction contracts which is distinctive and unique from other types of contracts is the provision of security from the contractor to the principal. Commonly, security takes the form of retention monies or bank guarantees. The consequences of having recourse to bank guarantees can be serious for the party providing the security (the security provider). In September 2020, the Supreme Court of Victoria handed down a decision in relation to bank guarantees. The decision Uber Builders and Developers Pty Ltd v MIFA Pty Ltd [2020] VSC 596 (Uber), sets out a helpful summary of the principles in respect of bank guarantees, interlocutory hearings and recourse to bank guarantees.

The Facts

Uber Builders and Developers (Uber) sought an injunction preventing MIFA from calling on its bank guarantees. MIFA asserted that it was entitled to have recourse to the bank guarantee as the Superintendent had certified amounts as payable by Uber in respect of rectification costs for defective and incomplete work, liquidated damages, credit allowances and purported variations. As a result of non-payment by Uber of these amounts, MIFA sought to have recourse to the bank guarantees to recover the amounts certified against Uber. To prevent MIFA from having recourse to the bank guarantee, Uber sought interlocutory relief (lawyer jargon for an interim/immediate court order) that MIFA was not allowed to have recourse to the bank guarantee.

The Principles

Nichols J summarised the governing principles in respect of where interlocutory relief is sought to restrain the calling of a performance bond/bank guarantee that has been given under a contract. There principles are:

  1. The applicant for interlocutory relief must show there is a serious question to be tried. The applicant, in this case Uber, must show that there is sufficient reason to think that the applicant would be successful if the matter were to progress to a final hearing;

 

  1. The applicant must show that the ‘balance of convenience’ favours the granting of the injunction. This means that the court should take whichever course appears to carry the lowest risk of injustice should it be wrong in either granting pr not granting the injunction;

 

  1. The court must consider whether damages would be an inadequate remedy. This means that the court has to consider whether the applicant would suffer irreparable injury for which monetary compensation would not be an adequate option; and

 

  1. These questions and factors to consider must be considered together and not as isolated issues.

 

In the context of setting out these guiding principles, Nichols J set out some drafting considerations for security clauses in construction contracts. These are summarised below:

  • Purpose: Bank guarantee or performance bonds may be stipulated for two reasons.
    • The first is to provide security against the risk that the security holder will not recover a sum owing by the defaulting party. In this way, the security acts as a means of ensuring the principal or security holder can recover some money if an amount is payable to the principal/security holder.

 

  • The second is to allocate risk as to who will be out of pocket while a resolution of a dispute is pending. If the security is to allocate risk, then the party holding the security may have recourse, even if it turns out that the other party was not actually in default.

 

  • Conditions of Recourse: If the purpose of the security is to act as an interim allocation of risk, then it is important to consider in what circumstances the principal/security holder will be entitled to have recourse to the security. The parties may agree to allow the security holder to have recourse to the security pending a final determination, but this right should be limited to certain circumstances. For instance, the parties may agree that recourse to the security can only occur if notice is given and/or where the dispute relates to damage caused by the security provider to the works/the project and/or adjoining properties.

 

  • Conditions imposed by the Courts: Where there are no contractual conditions under the contract, the Courts will prevent a party from calling on security where the security holder acts fraudulently or unconscionably in calling on the security.

 

  • Interim Risk Allocation: If the security is intended to be an interim risk allocation tool, the security holder will be entitled to have recourse to the security even if it turns out that the other party was not in default, notwithstanding the existence of a genuine dispute and a serious issue to be tried as to underlying entitlements.

 

Interim Risks

So far, this article has discussed a lot about ‘interim risk allocation’ but what does this actually mean and when is it relevant? Throughout the projects, various issues (such as the valuation of variations and defective work) may arise and payments are generally made on account only. At the end of the contract, the Superintendent will generally issue the final certificate. The final certificate will determine if there has been any over or underpayment by the principal to the contractor, whether there are any liquidated damages, and any other interim issue (such as the valuation of defective work and variations). If a party does not agree with payments to be made under the final certificate, they are generally able to issue a notice of dispute under the contractual provisions or can commence proceedings in relation to the contract. In these circumstances, the interim risk is the amount certified under the final certificate and a final determination of the issue made pursuant to a Court or the dispute resolution process set out in the contract. As the dispute resolution process (whether it be Court, expert determination, arbitration, or another dispute resolution forum under the contract) can take substantial time to finally determine the issues, if the security is an interim risk allocation tool, the principal will be able to have recourse to the security until the matter is finally determined. If it turns out the final certificate was incorrect, this will not prevent the principal from having recourse to security. It will mean that the decision maker will generally order for the principal to make payment of however much they have been overpaid so that the parties’ entitlements are finalised and concluded.

Bringing it back to the case study, Uber, the Superintendent certified that an amount was payable by the contractor to the principal. The contractor disputed the amount that was payable and did not make payment as and when required by the final certificate. As a result, the principal was entitled to have recourse to the security once it had complied with the conditions of recourse under the contract. As these conditions were predominantly notice requirements, the principal was not prevented from having recourse to the security. If Uber had made payment of the final certificate amount and issued the notice of demand, it is arguable that MIFA would not have been able to have recourse to the security. This is because MIFA would not be able to claim that the amount in the final certificate remained unpaid. As a result, contractors are put in the difficult position of paying a disputed amount or the principal may have recourse to the security.

The Takeaways

Intention of the Security

Parties need to be clear about the intentions behind providing security. This can be achieved by drafting the purpose of the security into the security clause of the contract. If there is an intention for the security to be an interim risk allocation tool, it will be much easier for the security holder/principal to have recourse to the security. If the security is only to protect against the failure to pay a sum owing by a party, then the security holder will be able to have recourse to the security if the amount is not paid as and when required under the contract.

Conditions of Recourse

Conditions of recourse essentially mean the security holder promises that they will not have recourse to the security unless those conditions are met. If the parties agree on the circumstances where the security holder can or cannot have recourse to the security, this will bind the security holder irrespective of the terms of the bank guarantee. Typical conditions include where the principal is entitled to payment under the contract.

If the security provider seeks to prevent the security holder from having recourse to the security, the security holder (generally the principal) will be required to show that it has met and/or followed the contractual process.

It is important to note that some jurisdictions, such as Queensland, may impose restrictions on when a party can have recourse to security. For example, under the Queensland Building and Construction Commission Act 1991 (QLD) section 67J(1)-(2), a principal may use a security or retention amount only if they have given 28 days’ notice in writing to the contractor advising of the proposed use and the amount owed. In these jurisdictions, the additional conditions will be imposed in addition to with the conditions of recourse under the contract.

Interim amounts owed

The crux of the purpose of security comes to a head in circumstances where a party disputes the amount owed. For instance, when the Superintended issues that final certificate (as was the case in Uber). If the security clause is drafted to allow for the security to be an interim risk allocation tool, the principal will be entitled to have recourse to the security. This will mean that contractor holds the risk of being out of pocket until the matter is finally determined.

If you are a developer, a contractor or a subcontractor and you or someone you know needs advice in respect of whether it is possible to have recourse to security, please get in touch with the staff at Bradbury Legal. Alternatively, if you are in the process of drafting and negotiating a contract, including the clauses relating to security, Bradbury Legal is able to assist and help you know exactly what you are signing up to.

NCC 2019 Amendment 1: Changes starting on 1 July 2020

In response to the recommendations of the Shergold Wier Building Confidence Report, the Australian Building Codes Board (ABCB) and the Building Ministers’ Forum have undertaken an out of cycle amendment to the National Construction Code (NCC). While the NCC was not due for review until 2022, the amendment known as “NCC 2019 Amendment 1” will be adopted by all Australian jurisdictions on 1 July 2020.

The NCC is a performance-based code containing technical standards for the design, construction and performance of buildings as well as for plumbing work and drainage systems. It is published and maintained by the ABCB and adopted by each Australian jurisdiction through its own legislation. For example, in NSW the NCC is given effect by the Environmental Planning and Assessment Act 1979 (NSW), the Plumbing and Drainage Act 2011 (NSW) and subordinate legislation.

The aim of the NCC is to create a uniform set of technical standards that apply to all Australian jurisdictions. However, as identified in the Shergold Wier Building Confidence Report, there have been a number of systematic issues with the implementation and enforcement of the NCC which has prompted NCC 2019 Amendment 1.

What will change?

Following a period of key stakeholder consultation last year, NCC 2019 Amendment 1 will introduce the following changes:

  • a new provision regarding egress from early childhood centres (NCC Volume One);
  • clarification of the concession that permits the use of timber framing for low-rise Class 2 and 3 buildings (NCC Volume One);
  • clarification that anti-ponding board requirements only apply to roofs where sarking is installed (NCC Volume Two);
  • an update to the Governing Requirements for all Volumes to require labelling of aluminium composite panels in accordance with SA Technical Specification 5344; and
  • correction of minor errors, including the correction of typographical errors and errors in diagrams.

In addition to the above, the ABCB announced last month that NCC 2019 Amendment 1 will also include a provision mandating the process for developing Performance Solutions. This process is based on the ABCB’s existing Development of Performance Solution Guideline and requires that the process for documenting Performance Solutions be commensurate with the complexity and risk of the design.

Unlike the other amendments, this amendment will not commence until 1 July 2021. However, as the process is included in NCC 2019 Amendment 1 there is plenty of time for industry participants to prepare necessary documentation to encompass the process for Performance Solutions prior to the amendment taking effect next year.

Other changes expected

It was also proposed that NCC 2019 Amendment 1 would include the new defined term of “building complexity”. The draft definition proposes a risk-based system from levels 0 to 5 for classifying complex buildings, which assists to identify buildings where additional regulatory oversight is needed during the design, construction and certification processes.

 

The ABCB announced last month that this new definition would not be included in NCC 2019 Amendment 1, however it has been published on their website with a six month consultation period for comments and feedback.

A copy of the preview of NCC 2019 Amendment 1 is available on the ABCB website via the NCC Suite.

If you or someone you may know is in need of advice regarding NCC 2019 Amendment 1 or the NCC generally, please contact our office by phoning (02) 9248 3450 or by email at info@bradburylegal.com.au.

Subcontractor Supporting Statements in the SoPA

It is commonly understood by participants within the building and construction industry that payment claims made by a head contractor under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SoPA), are to be served with a supporting statement in respect of subcontractors.

The purpose of imposing this obligation on head contractors is clear and simple: to ensure payment of subcontractors is a priority. Ideally, the inherent insolvency risks will be passed ‘up the chain’ to head contractors and ultimately, to the developers who are often better placed to weather the consequences.

But, what happens when the Head Contractor does not comply with their supporting statement requirements under the SoPA? Does the developer still need to pay it?

This question has been the subject of some judicial deliberation, and has been answered with some finality in the recent case of TFM Epping Land Pty Ltd v Decon Australia Pty Ltd [2020] NSWCA 93.

The Parties

TFM Epping and Katoomba Residence Investments Pty Ltd (TFM), as the developer, engaged Decon Australia Pty Ltd (Decon) as the builder and head contractor to carry out building and construction works on a residential development located at Epping in Sydney’s North West.

The Facts

On 3 June 2019, Decon served on TFM a Progress Claim under the SoPA, seeking approximately $6.4 million (the Claim). The Claim included works carried out throughout project history, for which Decon had not previously been paid.

The supporting statement accompanying the Claim had referenced only one subcontractor that had completed works about 1 year prior to issuing the Claim and specified that the supporting statement applied for works undertaken between 27 June 2018 and 3 July 2018.

TFM did not, within the 10 days prescribed by SoPA, serve a Payment Schedule on Decon, and as a consequence, became liable to pay the full sum sought in the Claim. Payment was not made.

On 3 July 2019 Decon filed a Summons and Notice of Motion in the Supreme Court of New South Wales, both of which sought summary judgment in their favour, for the full amount of the Claim. Shortly after, TFM filed a response, challenging the validity and service of the Claim.

The Decision at First Instance and Issues on Appeal

It was the decision of the Court at first instance that the response filed by TFM did not raise triable issues and to find in favour of Decon. On appeal, TFB sought to challenge this decision.

TFM sought to challenge the decision at first instance on the following 3 grounds:

  1. The Claim was not valid as it had not been accompanied by a supporting statement as required under s13(7) of the SoPA;
  2. The Claim sought payment in respect of variations, which were not performed under the contract and ought to have been claims in quantum meruit; and
  3. The Claim was invalid as it was not made in respect of an available reference date.

The key argument on appeal was that the supporting statement served by Decon was defective for the following reasons:

  • It had not included a ‘list’ of the subcontractors, it had simply given details of one subcontractor; and
  • The dates for which the supporting statement applied did not align with the dates of the works which were the subject of the Claim.

On this Basis, TFM asserted there was an absence of a compliant supporting statement, which rendered the service of the Claim invalid. In the alternative, TFM asserted the Claim itself was invalid.

The Decision on Appeal

The Court found in favour of Decon on all 3 grounds and dismissed TFM’s appeal for the following reasons.

Supporting Statements

The critical document giving rise to the legal right to recover (and obligation to pay) a progress payment, is the payment claim. Despite the wording of s13(7) of the SoPA, the Court determined that it does not attach a condition to the nature or content of the payment claim itself.

In arriving at this Decision, the Court noted that s13(7) of the SoPA included within itself a penalty for parties that did not comply, in terms of a fine. The Court gave significant weight to the purpose of the SoPA, and noted that in circumstances where Parliament has not stated an intended consequence, the Court would be reluctant to imply one.

Variations

The Court found that it could be possible that the variations had not properly arisen under the contract, for example, if some procedural step had not been taken. However, if TFM were of this view, the Court determined it ought to have been raised in a payment schedule. The Court found that including the variation items in the Claim, even if they were disputed, did not render the Claim invalid.

In the present case, Decon had not formulated the variations as a claim for quantum meruit, but rather had stated them to be a claim for work undertaken under the Contract.

Takeaway

This case highlights the fact that the document giving rise to the right to recover (and obligation to pay) a progress payment is the progress claim itself.

A failure to provide a supporting statement in accordance with the SoPA will not invalidate a progress claim. However, head contractors should take a strong note of the reference to the penalty provisions within the SoPA, and should ensure strict compliance with their obligations when serving payment claims for progress payments.

The case also serves as a reminder to respondents that the Court system cannot be used as a ‘second chance’ forum to respond to payment claims. The Court has shown it will not hear matters which should have been raised by way of a payment schedule, and determined in the adjudication system.

As always, preventing problems with your payment claims and payment schedules is much easier (and cheaper) than fixing them. If you or someone you know wants more information or needs help or advice, please contact us on 02 9248 3450 or email info@bradburylegal.com.au.