Article

Note: Tomkins Commercial and Industrial Builders Pty Ltd (Applicant/Contractor) contracted with Majella Towers One Pty Ltd(Principal/Beneficiary)to construct a residential apartment block at Woolloongabba. To assure its performance, Applicant/Contractor obtained two bank guarantees in favor of Principal/Beneficiary for 5 percent of the contract. One of the guarantees was returned to Applicant/Contractor following issue of a certificate of practical completion. Principal/Beneficiary held the second guarantee awaiting issue of the final certificate by a superintendent.

A superintendent assessed the calculation of Principal/Beneficiary’s estimate of money owed by Applicant/Contractor, and issued a Progress Certificate certifying that the total owed minus the value of the outstanding second guarantee was AUD 1,742,946.23 (“final certificate”). Applicant/Contractor issued notices disputing the final certificate to Principal/Beneficiary and the superintendent.

Thereafter, Principal/Beneficiary gave Applicant/Contractor notice of its intention to draw on the second bank guarantee, citing the final certificate and clause 5.2 of the contract, which permitted Principal/Beneficiary to draw on the guarantee once “[Principal/Beneficiary] remains unpaid after the time for payment has passed and 5 days have elapsed since [Principal/Beneficiary] notified [Applicant/Contractor] of its intention to have recourse.”

Applicant/Contractor then sued Principal/Beneficiary for an injunction to restrain drawing on the second bank guarantee and an order for Principal/Beneficiary to deliver it to Applicant/Contractor. Pursuant to an interim order, Applicant/Contractor paid AUD 607,647.50 into court, and Principal/Beneficiary returned the guarantee to Applicant/Contractor pending the trial court’s decision. The Supreme Court of Queensland, Brown, J., ruled in favor of Applicant/Contractor, awarding it AUD 607,647.50 plus interest.

Applicant/Contractor argued that under clause 5.2 Principal/Beneficiary was not entitled to draw on the bank guarantee unless: (1) the time for payment (under the contract) has passed; (2) Principal/Beneficiary remained unpaid; and (3) five days had elapsed since Principal/Beneficiary delivered notice of recourse to Applicant/Contractor. The primary issue was whether the time for payment had passed.

Applicant/Contractor contended that the time for payment had not passed because a notice of dispute regarding the final certificate was served within the meaning of Clause 37.4, providing that the final certificate would be evidence of the conclusion of the contract, unless there were unresolved issues subject to any notice of dispute. Applicant/Contractor claimed that the notice of dispute put the entire amount of the final certificate in dispute and, therefore, Applicant/Contractor argued that Principal/Beneficiary had no right to payment until the notice of dispute was resolved.

Applicant/Contractor claimed that Principal/Beneficiary was required, pursuant to clause 5.4 of the contract, to return the bank guarantee within 14 days, unless it could make a valid demand on the bank guarantee. Clause 5.4 of the contract stated that “a party’s entitlement otherwise to security shall cease 14 days after final certificate. Upon a party’s entitlement to security ceasing, that party shall release and return forthwith the security to the other party.” Applicant/Contractor contended that Principal/Beneficiary did not make a valid call on the bank guarantee, therefore no amount was due by Applicant/Contractor because a notice of dispute had been served in relation to the final certificate.

Principal/Beneficiary argued that Clause 37.4“only preserves a right to dispute the amount certified as being the actual amount of debt but does not change the interim nature of the entitlement to be paid”. Therefore, Applicant/Contractor had an obligation to make the payment, and if the final certificate found that Applicant/Contractor did not owe all or some of the money, then Applicant/Contractor had a right to restitution. Principal/Beneficiary also contended that “the contract should not be construed so that a party could avoid recourse to a bank guarantee by merely issuing a notice of dispute.”

The Judge agreed with Applicant/Contractor’s construction of the contract, ruling that the notice of dispute challenging the final certificate prevented any payment under the final certificate from being due. The Judge also found that there was nothing in the contract that made provisions in the event that the amounts would be disputed, and this suggests that it was not the parties’ intention that payment be made where it is the subject of dispute.

The Judge determined that in returning the bank guarantee, the trigger was the issue of the final certificate, and not that money was due reasoning that “construction [of ]the contract does not provide that the contractor must bear the risk of non-payment by the principal while disputing the final certificate.”The Judge found that Principal/Beneficiary should have returned the bank guarantee pursuant to Clause 5.4.

Text: The opinion contains the following clauses of the bank guarantee:

“5.2 Recourse

Subject to the following paragraph, security shall be subject to recourse by a partywho remains unpaid after the time for payment where at least 5 days have elapsed since that party notified the other party of intention to have recourse. (emphasis added)

The Principal is not entitled to have recourse to security to obtain an amount owed under the Contract unless the Principal has given written notice of the proposed use and the amount owed and such notice shall be given within 28 days after the Principal becomes aware, or after the Principal ought reasonably to have become aware, of the Principal’s right to obtain the amount owed.”

“5.4 Reduction and release

Upon the issue of the certificate of practical completion a party’s entitlement to security (other than in Item (14e) shall be reduced by the percentage or amount in Item 14(f) or 15(d) as applicable, and the reduction shall be released and returned within 14 days to the other party

…

A party’s entitlement otherwise to security shall cease 14 days after final certificate.

Upon a party’s entitlement to security ceasing, that party shall release and return forthwith the security to the other party.”
(emphasis removed)

“37.4 Final payment claim and certificate

Within 28 days after the expiry of the last defects liability period, the Contractor shall give the Superintendent a written final payment claim endorsed ‘the Final Payment Claim’ being a progress claim together with all the claims whatsoever in connection with the subject matter of the Contract.

Within 42 days after the expiry of the last defects liability period or within 10 business days after the receipt of the final payment claim, whichever is the earlier, the Superintendent shall issue to both the Contractor and the Principal a final certificate evidencing the moneys finally due and payable between the Contractor and the Principal on any account whatsoever in connection with the subject matter of the Contract.

Those moneys certified as due and payable shall be paid by the Principal or the Contractor, as the case may be, within 5 business days after the Principal receives the final certificate, or within 15 business days after the Superintendent receives the final payment claim.

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.”

(italics removed)

“42.1 Expert Determination

  1. If the parties cannot agree on an expert within 7 days, the expert will be appointed by an authorised officer of the Royal Institution of Chartered Surveyors (Queensland).
  2. In making a determination, the expert shall:
    1. give due weight to any written submissions or representations made by a disputing party within any reasonable time limit prescribed by the expert;
    2. give written reasons for his decisions;
    3. act as an expert and not as an arbitrator;
    4. in the absence of any manifest error, the decision of the expert on disputes up to a maximum value of $100,000 will be final and binding upon the parties and not subject to review; and
    5. for disputes in excess of $100,000 and in the absence of any manifest error, the decision of the expert will be final and binding on the parties and not subject to review, if neither of the parties has taken any steps to enforce a right or remedy by instituting proceedings relating to the dispute within 28 days of the written decision of the expert.
  3. The cost and expense of the conference and expert determination will be borne equally by the parties.”

[ACA]

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 the ICC or Coastline Solutions.