High Court reminder that it pays to take care with performance bonds

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The High Court in Simic v New South Wales Land and Housing Corporation [2016] HCA 47 has allowed an appeal against a decision of the NSW Court of Appeal on the construction of two unconditional performance bonds.  The appellant was the guarantor of a building company that tendered for a building contract from the respondent housing corporation.  The contract required the appellant to provide security in the form of bank guarantees.  The performance bonds were executed in favour of “New South Wales Land & Housing Department trading as Housing NSW ABN 45754121940” when in fact the beneficiary should have been ”New South Wales Land and Housing Corporation (ABN 24 960 729 253)”.  When the respondent called on the performance bonds, the bank refused to accept the demand based on the security being in favour of a non-existent entity.

The primary question concerned the obligation of the issuing bank to pay the demand of a party who claims to be the beneficiary which, as a result of common mistake, is not the beneficiary named in the performance bond.

However, the High Court held that the bank was justified in refusing to accept the demand under the performance bonds.  The bank was at risk of acting in breach of contract if it were to treat the bonds as referring to the respondent when the respondent was not the beneficiary.  The bank is usually not involved in the parties’ relationship and as such is entitled to take a “strict” approach in determining whether a demand fulfils the criteria for a demand for payment.

The High Court went on to decide that the wording of performance bonds may be rectified to reflect the true intention of the parties to the performance bond, (i.e. changing the name of the respondent in the performance bonds to “New South Wales Land and Housing Corporation”).  Rectification of the performance bonds would entitle the respondent to make a valid demand under the bonds which the bank must in turn honour.

This case highlights the importance of taking care when preparing performance bonds and bank guarantees.  It also allows banks to take a “strict” approach to such demands and alleviates the burden on banks to investigate the background of every demand for payment.

Time not a great healer of defects claims

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A recent Supreme Court decision has provided a timely reminder to building and construction litigants of the importance of considering limitation periods when prosecuting claims.  In The Owners – Strata Plan 7684I v Ceerose Pty Ltd [2016] NSWSC 1545 (Ceerose), the owners corporation did not have regard to the effect of relevant limitation periods and paid a hefty price.

What are the relevant limitation periods in New South Wales?

Generally, the relevant limitation periods for building actions are as follows.

  1. Breach of contract: a party has 6 years from the breach of contract to bring a claim for breach of contract.  If a claim is made under a deed, the limitation period is extended to 12 years.
  2. Negligence: the innocent party has 6 years from the negligent act becoming apparent to bring a negligence claim.
  3. Statutory warranties: for residential building work, a party has 6 years to bring a claim in respect of a major defect, extended to 6 years 6 months if the breach of warranty becomes apparent within the last 6 months of the warranty period.
  4. 10 year “long stop”: to bring a “building action” (an action for loss or damage arising out of or concerning defective “building work” (including design, inspection and certification works)), a party must bring a claim within 10 years after the date on which the final occupation certificate is issued.

The primary relevance of limitation periods is obvious – a party wanting to sue another party must do so within the prescribed limitation period depending on their cause of action and within the 10 year long stop for “building actions”.

However, the limitation periods are also relevant to related causes of action and cross-claims.  The failure to consider the overall effect of limitation periods can have adverse consequences for a plaintiff.

Ceerose decision

In Ceerose, the Owners Corporation commenced proceedings for breach of statutory warranties within time, however the Owners Corporation’s claim was not fully particularised and quantified and a series of amendments to the claim were made by the Owners Corporation.

The Owners Corporation applied for leave of the Court to further amend its claim.  The proposed amendment significantly increased the quantum of the Owners Corporation’s claim.

Ceerose opposed the Owners Corporation’s application to amend its claim for two reasons.

  1. Ceerose submitted that no amendments could be made to the claim after the 10-year long stop limitation period for “building actions” had expired because the amendments were out of time.
  2. Ceerose submitted that it would be prejudiced by the amendment because the 10 year long stop had passed and Ceerose was now out of time to cross-claim against relevant subcontractors.

The Court confirmed that the ‘cause of action’ for breach of statutory warranties was commenced within time and amendments were not a fresh ‘cause of action’ so the claim could be amended even after the 10 year long stop had passed.

However, the extent to which the Court was willing to permit the claim to be amended depended on the prejudice that would be suffered by Ceerose.

Ceerose had not taken steps to cross-claim against subcontractors because the quantum of the cross-claim did not justify the costs of bringing cross-claims when the owners corporation’s claim was first commenced and initially amended.  The 10 year limitation period for the cross-claims had passed.  For that reason, Ceerose argued that it would suffer irreparable prejudice if all of the amendments were allowed by the Court.

The Court determined that the builder would suffer irreparable prejudice if all of the amendments were allowed and refused to grant leave to amend as requested by the owners corporation.

The Court ordered that the Owners Corporation pay 75% of Ceerose’s costs in relation to the Owners Corporation’s motion seeking leave to amend.

Importance of prompt claims

Litigants and prospective litigants must always have regard to limitation periods.  Commencing proceedings within time is not the end of the story.

To avoid falling foul of limitation period issues, a plaintiff should move quickly to finalise the nature and quantum of its claim, usually by engaging appropriate experts to thoroughly inspect and document the extent of defects.

The consequences of not doing so can be costly.  In Ceerose, the owners corporation was unable to claim for hundreds of thousands of dollars worth of alleged defects and had to pay the majority of Ceerose’s costs of the motion.