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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.

Contractors – don’t use Dropbox if you want to get paid!

In Wärtsilä Australia Pty Ltd (ACN 003 736 892) v Primero Group Ltd (ACN 139 964 045) & Ors [2020] SASC 162, a contractor has failed to recoup $15M because it tried to submit completion reports via Dropbox link.  This is adds to the line of authorities which caution reliance on cloud-based technologies for issuing documents, whether under contract or statute.

Facts

Primero Group Ltd (Primero) contracted with Wärtsilä Australia Pty Ltd (Wärtsilä) to perform civil, mechanical and electrical works and supply tanks for the construction of the Barker Inlet power station on Torrens Island in South Australia.

The contract provided the following requirements for ‘SW Completion’:

(2) the tests, inspections and communications required by this subcontract (including Schedule 3) to have been carried out before SW Completion have been carried out, passed and the results of the tests, inspections and commissioning provided to [Wärtsilä]

(8) the completed quality assurance documentation … is available for inspection by [Wärtsilä] at the Facility Land’ (emphasis added)

Primero emailed Wärtsilä on 28 February 2020 a Dropbox link to the documents.  Yet Wärtsilä was unable to access the documents via the link until 2 March 2020.

On 2 March 2020, Primero served a payment claim under s 13 of the Building and Construction Industry Security of Payment Act 2009 (SA) in the amount of $85,751,118 (excluding GST).  On 10 March 2020, Wärtsilä responded with a payment schedule which scheduled “nil” but also stated that the payment claim was invalid as it was not supported by a reference date.

Primero proceeded to adjudication and the adjudicator determined Primero’s payment claim was valid, awarding $15,269,674.30 (excluding GST).  Key to the adjudicator’s determination was that the payment claim was supported by a reference date of 28 February 2020.  Wärtsilä made an application to the Supreme Court for an order quashing the adjudication determination.

The parties agreed that if SW Completion under the contract had not occurred on 28 February 2020 the adjudicator’s determination was invalid.[1]

Primero argued that it had provided the documents and made them available for inspection by sending the email.

Primero also contended that the Electronic Communications Act 2000 (SA) (ECA) permitted the contractual obligation for the provision of the documents to be satisfied by electronic communication.  Under s 8 of the ECA, the time of receipt of an electronic communication was when it is ‘capable of being retrieved by the addressee’.

Decision

Sending a Dropbox link to the documents was not sufficient for SW Completion.  On 28 February 2020, Primero had emailed the link to Wärtsilä, but Wärtsilä was unable to completely download the documents.[2]

Accordingly, the adjudication determination was quashed because it was not made with reference to a valid payment claim.[3]  The $15M award to Primero was nullified.

Stanley J held[4]:

  1. in relation to SW Completion item (2), ‘the provision of the hyperlink merely provided a means by which Wärtsilä was permitted to download the documents stored in the cloud. Until it did so, those documents had not been provided.

 

  1. in relation to SW Completion item (8), ‘the hyperlink did not amount to making the documents available for inspection… because until all the documents were downloaded, they were not capable of being inspected at the facility land.’

His Honour stated:

a common sense and businesslike construction of the contractual requirements that the documents be provided and are available for inspection necessarily requires that the documents were capable of being downloaded on 28 February 2020. I find they were not.[5]

Stanley J applied a Queensland case Conveyor & General Engineering v Basetec Services & Anor [2015] 1 Qd R 265 (Conveyor) and a Federal Court case Clarke v Australian Computer Society Inc [2019] FCA 2175 (Clarke), which went to the point that a document could not itself be considered to be “left at” or “sent” to an intended recipient if an email containing a link to the document was sent to that recipient.[6]  To summarise, it is only the email itself which is sent or transmitted, not the document housed on the cloud server.

The ECA did not apply to the communication to solve the problem for Primero because[7]:

Both s 8 and s 10 prescribe circumstances that condition the operation of those provisions. Those circumstances include: first, that at the time the information is given by means of electronic communication, it was reasonable to expect that the information would be readily accessible so as to be useable for subsequent reference; and second, that the person to whom the information is required to be given consents to the information being given by means of an electronic communication.

His Honour held that Conveyor and Clarke stood as authority for the proposition that the provision of the documents by hyperlink did not constitute an “electronic communication” for the purposes for the ECA.

This point is highly relevant to because the relevant legislation governing electronic transmissions and communications are modelled off uniform Commonwealth legislation (Electronic Transactions Act 1999 (Cth)) and have largely consistent provisions.

Take Home Tips

It is important to consider closely whether the terms of your contract allow you to submit completion documents (or other documents) via a Dropbox link.  If the contract uses words like “provide”, “send”, “make available”, etc, it is unlikely that merely providing a link to those documents will satisfy the obligation unless and until the documents are actually downloaded or accessed in full by the intended recipient.  This can be difficult to prove.

It is unlikely that you will be able to fall back on the relevant electronic communications or transactions legislation in your jurisdiction because the provision of the link will not be considered an “electronic communication” of the document itself.  Strict compliance with the contract and statute (particularly in the realm of security of payment) is always required.

[1] At [12].

[2] At [93].

[3] At [128].

[4] At [94].

[5] At [105].

[6] At [98] to [101].

[7] At [117].