Article

Note: Beyfield Pty Ltd. (Subcontractor) contracted with Northbuild Construction Sunshine Coast Pty Ltd. (Head Contractor) to construct a Chronic Disease Centre on Thursday Island. Subcontractor provided Head Contractor with two bank guarantees as security for the performance of the work under the agreement.

Clause 5 of the Contract provided that Head Contractor could "have recourse to the Retention, or convert into cash any Bond or Instruments substituted by the Subcontractor where an amount is due to" Head Contractor upon giving 28 days written notice to Subcontractor under Queensland Building Services Authority Act of 1991.

After two years, Head Contractor gave notice to Subcontractor of its intention to draw on the bank guarantees because of additional costs incurred as a result of Subcontractor's alleged breach of the subcontract regarding Indigenous Employment Policy ("IEP"). Subcontractor sued Head Contractor for declarations that Head Contractor was not entitled to call on the bank guarantees and that Subcontractor did not breach the IEP. The Supreme Court of Queensland, Martin, J. ruled in favor of Subcontractor.

The Judge ruled that the bank guarantees were securities under the Queensland Building Services Authority Act of 1991, which is defined as something

"(a) given to, or for the direct or indirect benefit of, the contracting party for the contract by or for the contracted party for the contract; and

(b) intended to secure, wholly or partly, the performance of the contract; and

(c) in the form of either, or a combination of both, of the following -

(i) an amount, other than an amount held as a retention amount for the contract;

(ii) 1 or more valuable instruments, whether or not exchanged for, or held instead of, a retention amount for the contract."

Section 67E of the Act also provides that

"(2) However, if a building contract, or a provision of a building contract, is inconsistent with a provision (the Act provision) of this part applying to the building contract, the building contract, or the provision of the building contract, has effect only to the extent it is not inconsistent with the Act provision.

(3) Without limiting subsection (2), a building contract is unenforceable against the contracted party for the contract to the extent that the contract provides for retention amounts or security in a way that is inconsistent with a condition to which the contract is subject under division 2.

(4) This part- (a) has effect in relation to a building contract despite anything in the building contract."

Section 67J provides that "

(1) The contracting party for a building contract may use a security or retention amount, in whole or in part, to obtain an amount owed under the contract, only if the contracting party has given notice in writing to the contracted party advising of the proposed use and of the amount owed.

(2) The notice must be given within 28 days after the contracting party becomes aware, or ought reasonably to have become aware, of the contracting party's right to obtain the amount owed...

(5) In this section-

amount owed, under a building contract, means an amount that, under the contract, is a debt due from the contracted party for the contract to the contracting party for the contract because of circumstances associated with the contracted party's performance of the contract.

use of security or retention amount includes the act of converting securities into cash where the securities are held as negotiable instruments."

The question before the court was whether Clause 5 of the Contract was void and unenforceable. The Judge stated that Subcontractor did not breach the contract regarding the IEP and that the damages incurred from not complying with the IEP were not "an amount due to the building under the subcontract nor can it be a claim to payment," thus not a "debt due" associated with Subcontractor's performance of the contract. In addition, the Judge concluded that Head Contractor was not entitled to freight charges because the claims for freight were not bona fide. Because there was no existence of a bona fide claim, there was no right for Head Contractor to convert a security.

Example of Text of Contract regarding Guarantees in Opinion:

"Clause 5 provides:

(a) Subject to this subcontract, the Builder may deduct and retain 10% of any progress payment to the Subcontractor until the total Retention equals 5% of the Subcontract Sum as security for the performance of the Works."

[JL]

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.