Australia: Restrictions on a principal’s right to call on security under AS 4000-1997

Introduction

Mainstream (Aust) Pty Ltd v Gilpip Bayside Projects Pty Ltd [2013] VSC 610 is the most recent in a long list of cases which considers the restrictions on a Principal's right to call on security. The effect of this case is that a Principal is likely to be prevented from calling on security provided by a Contractor under AS 4000-1997, where the:

  • Superintendent has certified that the Contractor owes the Principal a debt under the final certificate; and
  • Contractor has disputed that it owes the Principal that amount by validly serving a Notice of Dispute.

Although this case concerns specific facts, including the wording contained in AS 4000-1997, it could have broader implications for other contracts, if it can be said that the:

  • terms of the contract provide that amounts certified under a final certificate do not constitute a "debt", if a notice of dispute is served; or
  • parties have entered into a "contractual promise" not to call on the security.

Background

On 12 July 2010, Mainstream (Aust) Pty Ltd (the Contractor) and Gilpip Bayside Projects Pty Ltd (the Principal), entered into a contract for the refurbishment and construction of residential accommodation in Mornington. The contract was for the sum of $9,649,176 and was in the form of an AS 4000-1997. The Contractor provided $238,729 in security, by way of a bank guarantee.

There were a number of disputes which arose in relation to the project, and ultimately the Contractor stopped work on the basis that the Principal had provided an insufficient response to a show cause notice. However, save for some minor defects, the works were completed.

At the expiry of the defects liability period, the Superintendent requested that the Contractor submit a final payment claim. The Contractor did so. The Superintendent responded with a "Final Payment Certificate", indicating that the Contractor owed the Principal $70,166.62. Six days later, pursuant to clause 42.1, the Contractor served a Notice of Dispute on the Principal in relation to the amount certified in the Final Payment Certificate.

The next day, the Principal served a letter on the Contractor stating that it intended to draw on the Contractor's bank guarantee, in order to satisfy the outstanding $70,166.62 debt. The Contractor and the Principal then entered into negotiations, which resulted in the original bank guarantee being replaced with a new one for the sum of $73,000. This agreement to substitute the bank guarantee was recorded in a letter dated 30 August 2013, which was signed by both parties.

On 13 September 2013, the Principal gave the Contractor a notice that it intended to have recourse to the substituted $73,000 bank guarantee.

The Contractor then commenced proceedings in the Victorian Supreme Court, seeking an injunction restraining the Principal from calling on the substituted bank guarantee.

Relevant Contractual Clauses

Clause 5 of the contract set out the security regime under the contract. Notably, clause 5.2 provided that the Principal was entitled to have recourse to the security where it remained unpaid after the time for payment, and 5 days had lapsed since a notice of an intention to draw on the security was served on the Contractor.

The relevant part of clause 37.4(d) provided:

"The final certificate shall be conclusive evidence of accord and satisfaction, and in discharge of each party's obligations in connection with the subject matter of the Contract except for:

...
(d) unresolved issues the subject of any notice of dispute pursuant to clause 42, served before the 7th day after the issue of the final certificate".

Clause 42 provided that if a dispute or difference arose between the parties in relation to a number of matters, including a direction by the Superintendent (which was defined broadly to include certifications and assessments made by the Superintendent), then either party may serve a Notice of Dispute. The Notice of Dispute would then trigger the dispute resolution process set out in the contract, requiring that the parties take part in a conference and, failing resolution, participate in an arbitration.

Decision

Justice Vickery ordered that an injunction be granted restraining the Principal from calling on the bank guarantee until the conclusion of a full trial on these matters.1

In reaching this decision, Justice Vickery cited a decision from earlier in the year2 as authority for the position that the Court's decision to grant injunctive relief is discretionary and, will be made where the court is satisfied that:

  • there is a serious question to be tried, in the sense that the plaintiff is able to show that its arguments have a sufficient likelihood of success if they were determined at trial (serious question to be tried);
  • if there is no injunction but the plaintiff's claim is ultimately vindicated, the plaintiff will have suffered irreparable harm for which damages will not be an adequate remedy (irreparable harm); and
  • the balance of convenience favours the grant of the injunction.3

Justice Vickery's reasoning in relation to the first two points is set out below. Based on the application of these principles to the facts, it was held that the balance of convenience favoured granting the injunction.

Serious question to be tried

The Principal, in resisting the application for an injunction, pointed to the Final Payment Certificate as evidencing a debt, entitling the Principal to call on the bank guarantee under clause 5.

In response, the Contractor relied on the Queensland Court of Appeal's decision in Martinek Holdings Pty Ltd v Reed Construction (Qld) Pty Ltd [2009] QCA 329 (Martinek Holdings), which considered the application of clause 37.4(d) in the context of an interim adjudication.

The Contractor argued that Martinek Holdings should stand as authority for the position that where a Notice of Dispute has been issued, which disputes the financial liability on the part of a Contractor to pay the Principal under a final certificate, the final certificate does not represent a finalised debt. Rather the Notice of Dispute, by virtue of clause 37.4(d), renders the amount in the final certificate as in dispute, and therefore incapable of being a debt due giving rise to a right to call on the Contractor's security.

Justice Vickery agreed that the reasoning in Martinek Holdings was applicable here, and therefore, the argument that no debt had in fact arisen due to the operation of clause 37.4(d) had a sufficient prospect of success to show that there was a serious issue to be tried.4

In addition, Justice Vickery discussed the situations where a Principal will be prevented from calling on security and concluded that there were three possible circumstances: fraud, unconscionability, and where there is a "contractual promise that the security will not be called on". Justice Vickery held that the facts of this case pointed to the Principal arguably having made a contractual promise that it would not call upon the substituted security, in the circumstances that arose in this case.5

The judgment does not make it clear whether the contractual promise was inferred from the terms of the contract, the agreement set out in the letter of 30 August 2013 or some other conduct of the Principal.

Irreparable harm

Justice Vickery accepted the evidence of the Contractor that it was a relatively small builder, and that calling on the bank guarantee would put Contractor's "entire business at risk". Accordingly it was accepted that if the injunction were not granted the Contractor could suffer irreparable harm, for which damages would not be an adequate remedy.6

Implications

As set out above, although this case concerns specific circumstances and is in relation to the wording of AS4000-1997, it is possible that it could have broader application. Importantly this case serves as another reminder that the Principal's right to call on security is not an unqualified one, even if it appears to be at first instance.

Footnotes

1Mainstream (Aust) Pty Ltd v Gilpip Bayside Projects Pty Ltd [2013] VSC 610 (Mainstream) at [57].
2Perfection Fresh Australia Pty Ltd & Ors v Melbourne Market Authority [2013] VSC 287.
3Mainstream at [57], [64].
4Mainstream at [57].
5Mainstream at [65] – [66].
6Mainstream at [58] – [63].

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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