Article

* Dr. Alan DAVIDSON is Senior Lecturer TC Beirne School of Law University of Queensland, Australia. This summary was submitted by Dr. DAVIDSON. The facts have been reformatted and rearranged by the IIBLP staff to correspond with the formatting used in this volume but the legal analysis and comments are those of the author.

Topics: Advance Payment Bond; Contractual Negative Stipulation; Negative Stipulation, Contractual

Note: Lindsay Bennelong Developments Pty Ltd (Beneficiary) and Kell & Rigby Holdings Pty Ltd (Applicant) entered into a construction contract for Applicant to build a mixed commercial and residential development at Rushcutters Bay, Sydney, Australia. Pursuant to the contract, Beneficiary appointed its own Development Director, Mr Bryden, as Superintendent, who was given the power under the contract to vary the works and issue certificates of practical completion.

On 8 December 2009, Applicant and Beneficiary entered into an Advance Payment Deed in which Applicant received a payment of A$2 million. The Applicant provided two Advance Payment Bonds each in the form of an unconditional Bank Guarantee from the Commonwealth Bank of Australia (Guarantor) for A$1 Million. Clause 42A.4(d) provided:

"(d) If an Advance Payment has not been repaid on or before:

(i) the date of issue of the Certificate of Practical Completion for Stage 3;

... the whole of the balance of all Advance Payments then outstanding shall immediately become a debt due and payable."

When the Advance Payment was not repaid, the Beneficiary claimed that moneys were owing and overdue. Beneficiary was concerned about the Applicant's solvency.

As at 31 May 2010, according to the "unchallenged evidence" of Mr Bryden, works had not reached a stage in which it was "in settleable form". However, on 21 June 2010, Mr Bryden issued, in immediate succession, two instruments each on the Beneficiary's letterhead. The first was a "Notice of Variation to Works" providing that for Stages 2 and 3 the balance of the specified outstanding works would be deleted for completing purposes. The second was a "Certificate of Practical Completion". Based on these instruments Beneficiary immediately made demand on the Guarantor under clause 42A.4(d)(i).

The Guarantor took the position that "if it was not restrained by the Court by 5.00pm that day, it would pay." Application was made and an interim injunction issued required that any demand be withdrawn. At the final hearing, the court entered an order that Applicant was not entitled to call on the Guarantees.

Beneficiary claimed:

(a) it is "entitled to call on the Guarantees even if the Certificate of Practical Completion was of no effect or vitiated, because the Guarantees reflect an unconditional right ... to make demand";

(b) "the Superintendent is empowered to vary the Works by deleting therefrom any part ...";

(c) "upon that Notice of Variation to Works being given the Works were fully complete ..." and;

(d) "the Certificate of Practical Completion was validly given".

Applicant claimed:

(a) "there is to be implied into the Contract a negative stipulation that [Beneficiary] will not call on the Guarantees ... if repayment is not due";

(b) "the Certificate of Practical Completion ... is invalid and is of no force and effect";

(c) "repayment of the Advance Payment was not on 21 June 2010, and is not now due";

(d) a call by Beneficiary is in breach of the negative stipulation and should be restrained;

(e) in the alternative, the Certificate of Practical Completion should be set aside on the grounds that Beneficiary engaged in unconscionable conduct in contravention of s 51AA Trade Practices Act 1974 (Cth).

Negative Stipulation

The Court held that the Contract contained an implied negative stipulation binding Beneficiary not to call on the Guarantee on the facts. Whether the Contract contains a negative stipulation is a matter of the proper construction in the context of the whole of the Contract: see Clough Engineering Ltd v Oil & Natural Gas Corporation Ltd [2008] FCAFC 136. The court construed the contract as having three specific circumstances in which a call could be made, specifically clause 42A.4(d) above. Secondly, the court construed the "right" to be "asserted" rather than "established". Additionally in this context, an Advance Payment Bond reflects an intention that security is being provided for the repayment of an Advance Payment when it is due and not otherwise, "rather than an intention temporarily to allocate risk."

Decision

The evidence made it clear that the purpose of giving the Notice of Variation to Works was to bring about Practical Completion. The court then questioned whether the Beneficiary (as Superintendent) acted beyond its power in giving the Notice of Variation to Works. The court held that the Contract is to be given a business-like interpretation. The "stated purpose" of the contract was to provide multi-storey commercial and residential buildings.

The court regarded the deletions from Stage 3 to be "of such a profound nature" that the partially constructed buildings could not reasonably be used as commercial and residential buildings. The court held that "the plain meaning of the words seen in the context of the Contract as a whole do not confer a power to effect variation to the Contract which changes the Works so that what is constructed cannot reasonably be capable of being used for their stated purpose." "It would not be commercial, sensible or conducive to the congruent operation of the Contract as a whole so to construe that power."

One week before the issue of the notices, a decision had been taken by Mr Bryden with the Beneficiary that the Beneficiary would take over the project. Beneficiary then determined a method. The course adopted was thus driven by the improper consideration that it was a means by which the Beneficiary as Principal could take over the project rather than a means to bring about appropriate variations to the Works.

Accordingly the court held that the Superintendent did not act honestly and fairly for the following reasons:

- the Principal(Beneficiary) and the Superintendent are one and the same person;

- took improper considerations into account;

- paid either no or insufficient regard to the plaintiff's interests and did not act with any impartiality let alone with the degree of impartiality that was required of him in the circumstances;

- acted on the instructions of Mr Campbell, a director of Beneficiary;

- failed to take into account the Applicant's interests.

The argument that the Superintendent acted unfairly or unconscionably did not have to be examined, because it would have proceeded on the assumption that the Superintendent had power to issue the Notice of Variation. Nevertheless, the Court determined that the conduct was not unconscionable, stating: "Absent the breach it did nothing which would have disentitled it from insisting on its rights."

The court issues a declaration that Beneficiary is not entitled to call on the Guarantees.

Comments:

An unremarkable decision. There was no discussion regarding the "unconditional right" under the guarantee to make a demand. The court immediately examined the underlying contract for terms dealing with negative stipulations not to make a call. The Applicant was perhaps fortunate that the court ruled that the Beneficiary exceeded its power. It seems somewhat incongruous that the Applicant should permit the Beneficiary to vary the scope of the works, whilst at the same time attaching the trigger to a demand on the Guarantee on the result of the variation.

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