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Note: Clark Road Developments Ltd. (Principal/Applicant) hired Rohits Civil & Infrastructure Ltd. (Contractor/Beneficiary)to perform construction services on a property subdivision. The main contract provided for a flexible total price, to be calculated over the course of the project by Principal/Applicant’s engineer according to a price schedule. Contractor/Beneficiary required Principal/Applicant to obtain a “Principal’s Bond” (the bond)in its favor as a security for payments due to Contractor/Beneficiary under the main contract, which provided that both Principal/Applicant and China Construction Bank (New Zealand) Ltd. (Bond Issuer) were liable for up to NZD 600,000.

The bond stated that Bond Issuer would pay “upon demand by the [Contractor/Beneficiary], without enquiry as to, and without having regard to, the position as between the [Contractor/Beneficiary] and the [Principal/Applicant], or whether or not the [Principal/Applicant] is in default”. The bond also stated that “THE conditions of this bond are that it shall be null and void if: a) The Principal has paid to the Contractor the Contract Price and any other monies payable to the Contractor under the Contract”.

After Principal/Applicant failed to make payments, Contractor/Beneficiary issued a default notice and offered new terms to be followed for work to continue. The next day, Principal/Applicant issued a notice stating that default payments had been cleared, and directed Contractor/Beneficiary to continue under the original terms. When Principal/Applicant again failed to make payment, Contractor/Beneficiary notified Principal/Applicant that it was in breach of the modified terms and withdrew from the worksite, notifying Principal/Applicant that it was cancelling the contract. Contractor/Beneficiary then drew on the bond. When Bond Issuer refused to honor, claiming that the bond was null and void, Contractor/Beneficiary then sued Principal/Applicant and Bond Issuer and moved for summary judgment for NZD 600,000. The High Court of New Zealand, Auckland Registry, Muir, J., granted summary judgment in favor of Contractor/Beneficiary.

Principal/Applicant argued that its obligation under the bond depended on obligations under the main contract, pointing to both the use of the term “surety” as a name for Bond Issuer throughout the bond and the null-and-void clause of the bond which restricted withdrawal. The Judge, however, determined that the bond was on-demand and independent of the underlying contract, based on the text of the bond which provided that Bond Issuer pay “upon demand… without having regard to, the position as between the Contractor and the Principal”. The Judge noted several contextual factors to support the finding that the bond was an independent undertaking: Bond Issuer was a bank, there were no pre-conditions to the making of a demand, and on-demand bonds are normal in financing construction projects.

Principal/Applicant further argued that the bond was null and void by its own terms because the contract price had been paid, relying on an interpretation of the contract price as the price of the construction that had been completed so far. Since Principal/Applicant paid for the completed work when Contractor/Beneficiary made a call on the bond, the bond should have been considered null and void. Contractor/Beneficiary, however, interpreted the contract price as the future forecast sum, i.e. because Principal/Applicant had not paid for planned construction work, it had not paid the contract price and therefore the bond was valid at the time of presentation. The completed-work-price and the forecast-sum-price were consistently recorded as separate amounts on the engineer’s certificates.

The Judge determined that the contract price for purposes of both the bond and the main contract was the forecast sum. In his finding, the Judge relied on a clause of the main contract which explicitly defined the term “Contract Price” as the amount “payable for the completion of the Contract Works”. The Judge also pointed to the text of the bond referring to payment of the contract price “and any other monies payable”. Finally, the Judge determined that the purpose of the bond was to secure Contractor/Beneficiary’s payment for an assumed completion of work. Until Principal/Applicant paid the forecast sum of the complete project, Contractor/Beneficiary was entitled to call on the bond.

Text:

The opinion contained the following excerpts from the bond:

  1. “The Principal has entered into an agreement with the Contractor by which the Contractor has agreed to carry out and fulfil the obligations imposed on the Contractor (‘the Contract’).

  1. The Contract requires the Principal to provide the Contractor with security in the form of a bond to ensure performance of the Principal’s obligations under the Contract.

  1. THE Principal and Bond Issuer are jointly and severally held and bound to the Contractor in the sumofNZD600,000.00 (Six hundred thousand and 00/100 New Zealand Dollars) (the ‘bond sum’) and bind themselves, their successors and assigns jointly and severally for the payment of that sum.

  1. THE Bond Issuer irrevocably and unconditionally undertakes, as primary obligor, to pay to the Contractor any sum or sums which may, from time to time, be demanded in writing by the Contractor, up to an amount not exceeding in aggregate the amount nominated at 1 above. The Bond Issuer shall make payment forthwith upon demand by the Contractor, without enquiry as to, and without having regard to, the position as between the Contractor and the Principal, or whether or not the Principal is in default under the Contract Documents. Payment will be made without reference to, and not withstanding any instruction from the Principal to the Bond Issuer to the contrary.

  1. THE conditions of this bond are that it shall be null and void if:
    1. The Principal has paid to the Contractor the Contract Price and any other monies payable to the Contractor under the Contract; or
    2. The Bond Issuer has received notification from the Contractor that this bond is no longer required; or
    3. The Bond Issuer pays the Bond Sum to the Principal; or
    4. The expiry date of1.00 pm on 30th November2017”

The opinion contained the following excerpts from the construction contract:

“The Principal shall pay the Contractor the sum of$5,753,645.60 (excluding GST) or such greater or lesser sum as shall become payable under the Contract together with goods and services tax at the times and in the manner provided in the Contract.”

“The sum provided in the Contract as payable for the completion of the Contract Works calculated in accordance with 2.2, 2.3 or2.4 as applicable, subject to such adjustments as are provided for in the Contract.”

“In a measure and value contract the Contract Price shall be calculated according to the measured quantity, as determined by the Engineer, of each item of work carried out at the rate set out in the Schedule of Prices, subject to such adjustments as are provided for in the Contract.”

“Contract Price

The Contract Price may or may not be stated in the Contract as a precise sum. It may be a matter of calculating the Contract Price during the course of the Contract, particularly in the case of measure and value and cost reimbursement contracts, and always subject to any adjustments provided for in the Contract.”

[EHM]

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