Icon Co (NSW) Pty Ltd v Australia Avenue Developments Pty Ltd

1. [1]

   By a design and construct contract (“the Contract”) dated 29 October 2015 between the plaintiff, Icon Co (NSW) Pty Ltd (“the Builder”), and the defendant, Australia Avenue Developments Pty Ltd (“the Principal”), the Builder agreed to design and construct the high-rise mixed residential and commercial development known as “Opal Towers” located at Sydney Olympic Park.

2. [2]

   On 4 February 2020 the Principal gave the Builder notice that it proposed to call on an unconditional and irrevocable bank guarantee (“the Guarantee”) in a sum in the order of $3.9 million established by the Builder under the Contract.

3. [3]

   The Builder seeks to restrain the Principal from calling on the Guarantee.

4. [4]

   It is common ground that, were I to conclude that the Principal should not be so restrained, the Principal will accept an equivalent cash payment from the Builder in lieu of calling on the Guarantee and undertakes not to call on the Guarantee if such cash payment is made. There is no suggestion that the Builder is unable to make such a payment.

Decision

1. [5]

   The Builder has not established that the Principal is not entitled to call on the Guarantee.

2. [6]

   In any event, in the particular circumstances of this case, I am not satisfied that damages would not be an adequate remedy for the Builder.

3. [7]

   Accordingly the proceedings should be dismissed.

The cracking at Opal Towers

1. [8]

   On 24 December 2018 damage was identified on a level of Opal Towers. The building was vacated. Residents returned to the building shortly thereafter.

2. [9]

   However, on 27 December 2018 further damage was identified on another level of the building. The building was again vacated.

3. [10]

   The Builder has worked to rectify the problem. It has, it says, expended some $25 million endeavouring to do this. The residents have returned progressively. The last residents returned in December 2019.

4. [11]

   The damage has been the subject of investigations, including by experts appointed by the NSW Minister for Planning and Housing.

5. [12]

   On 19 February 2019 those experts provided advice to the Minister to the effect that the cracking at Opal Towers had been caused by deficiencies in the design and construction of the building.

6. [13]

   The experts concluded that:

7. [14]

   The Principal has commenced proceedings against the Builder in this Court for various forms of relief, including for breach of contract and misleading or deceptive conduct. In those proceedings the Builder has cross-claimed against its subcontractor, WSP Structures Pty Ltd which designed the works of the buildings.

8. [15]

   The owners of lots in the building have commenced representative proceedings against the Sydney Olympic Park Authority. The Authority has joined both the Builder and the Principal as cross-defendants in those proceedings.

9. [16]

   The principal contention advanced by the Builder in both those proceedings is that the cracking that has appeared in the building was caused by defects in the design prepared by WSP Structures.

The Security Recourse Events

1. [17]

   Clause 5.1 of the Contract provides that the Builder must provide “security” (that is, the Guarantee) “for the purpose of securing the proper performance of [its] obligations to the Principal under the Contract”.

2. [18]

   The circumstances in which the Principal may have recourse to the Guarantee are set out in cl 5.2 which provides, emphasising the words relied on by the Principal:

3. [19]

   The Principal contends it is entitled to call on the Guarantee because:

First Security Recourse Event – the Principal’s entitlement to exercise a right

1. [20]

   The “right” that the Principal contends it is entitled to exercise is the right to deduct from the security “moneys claimed” by it pursuant to cl 37.4(b) of the contract.

2. [21]

   Clause 37.4 provides, emphasising the words relied on by the Principal:

3. [22]

   In a letter dated 4 February 2020, the Principal specified the “moneys claimed” as:

4. [23]

   The Principal stated that it had “assessed” its claim as exceeding $6.795 million.

5. [24]

   On the face of cl 37.4, the Principal is entitled to deduct from moneys that may otherwise be payable by it to the Builder, and to have recourse to the Guarantee for:

6. [25]

   The use in the chapeau to cl 37.4 of the words “any debt due” in conjunction with, only a few words later, “or moneys claimed” suggests that the parties intended those words to have different consequences.

7. [26]

   A “debt due” from the Builder to the Principal may well be one that must be found “as a matter of objective fact” (to adopt the language of Macfarlan JA in Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd [2010] NSWCA 283 at [41]) or to be a result of the Builder being “actually in default” (to adopt the language of White J in Universal Publishers Pty Ltd v Australian Executor Trustees Ltd [2013] NSWSC 2021 at [44]-[46]).

8. [27]

   On the other hand, “moneys claimed” by the Principal from the Builder would seem, on the face of it, to require no more than that the Principal in fact make a “claim” for the moneys and that such claim be “genuine” and “bona fide” (words actually used in cl 5.2(a)(iv) to which I will return). That is, the “claim” must be “non-fraudulent” and “genuine” and not “specious, fanciful, or untenable” (to adopt the words of Pembroke J in FMT Aircraft Gate Support Systems v Sydney Ports Corporation [2010] NSWSC 1108 at [13]-[14]).

9. [28]

   Mr Miller SC, who appeared with Mr Smith for the Builder, submitted that the words “or moneys claimed” in cl 37.4 should be read so that the “right” exercisable by the Principal, for the purposes of cl 5.2(a)(i), only arises if the Principal was entitled to claim the moneys in question. That is, only if the moneys were “actually” due.

10. [29]

    But that is not what cl 37.4 says. Indeed, as I have said, the clause draws a distinction between a “debt due” and “moneys claimed”.

11. [30]

    Mr Miller developed his argument by reference to cl 37 as a whole, and in particular cl 37.2.

12. [31]

    Clause 37 deals with “Payment”. Clause 37.1 provides for the making by the Builder of a payment claim.

13. [32]

    Clause 37.2 provides for the creation by the Superintendent, on behalf of the Principal, of a progress certificate which sets out, amongst other things:

14. [33]

    Mr Miller submitted that if, under cl 37.4, the Principal could simply deduct from the amount payable to the Builder any money it “claimed” to be due to it, it “would make inutile the whole 37.2 process, and in particular the 37.2(e) process”.

15. [34]

    Mr Miller submitted that the reference in cl 37.2(e) to the amount that the Principal is “entitled” to deduct from the Builder’s payment claim necessarily informs the manner in which cl 37.4 should be construed.

16. [35]

    Thus Mr Miller submitted:

17. [36]

    In argument, I asked Mr Miller what changes would need to be effected to the wording of cl 37.4 to reconcile that subclause with such a reading of cl 37.2.

18. [37]

    Mr Miller submitted that the words “moneys claimed” in cl 37.4 should be read as if they said something to the effect “moneys the Principal is entitled to claim”.

19. [38]

    Alternatively, Mr Miller submitted, the chapeau to cl 37.4 should be read as if it said:

20. [39]

    I see two problems with these submissions.

21. [40]

    First, they do considerable violence to the wording of cl 37.4 and in substance involve a re-writing of the clause.

22. [41]

    Second, they overlook the fact that the reference in cl 37.2(e) to the amount that the Principal is “entitled” to retain is a reference to such “entitlement” under cl 37.4.

23. [42]

    In my opinion, there is no tension between the two clauses. The Principal is “entitled” under cl 37.4 to deduct from money otherwise payable by it to the Builder “moneys claimed” by it under or in connection with the Contract. Under cl 37.2 the Superintendent must set out in the progress certificate any such amounts.

24. [43]

    The primacy thus accorded to the Principal’s “claim” is confirmed in this paragraph which appears later in cl 37.2:

25. [44]

    Such primacy is also confirmed by provisions of cl 37.2A of the Contract, which deal with “Payment” and provide, in terms, that the Principal’s obligation to pay the “scheduled amount” to the Contractor is subject to cl 37.4(a).

26. [45]

    For those reasons, I see nothing in cl 37.2 to compel the conclusion that cl 37.4 should be read otherwise than in accordance with its terms.

27. [46]

    Mr Miller also submitted that a literal wording of cl 37.4 would render otiose sub-cl 5.2(a)(iv) which, to repeat, provides that there is a “Security Recourse Event”:

28. [47]

    If, Mr Miller submitted, the effect of cl 5.2(a)(i), when read with cl 37.4, is that there is a Security Recourse Event because the Principal’s “entitlement to exercise a right” under cl 5.2(a)(i) arises under cl 37.4 simply because it “claims” that “moneys” are due, there would be no point in the parties also providing, in cl 5.2(a)(iv), that the Security Recourse Event arises if the Principal has a genuine bona fide claim against the Builder of the kind there set out.

29. [48]

    It is common ground that a “claim” made by the Principal under cl 37.4 must be a “genuine bona fide claim” (see [27] above). This requirement appears in terms in cl 5.2(a)(iv).

30. [49]

    The difference between the two clauses is that the “moneys claimed” in cl 37.4 must be “under or in connection with the Contract” whereas the “genuine bona fide claims” referred to in cl 5.2(a)(iv) must be ones “arising out of or in connection with the termination of the Contract” (emphasis added).

31. [50]

    Mr Braham SC, who appeared with Mr Gray, accepted that this was a “drafting curiosity”.

32. [51]

    He submitted:

33. [52]

    I agree. I do not see this “drafting curiosity” as a reason to read down the clear wording of cl 37.4.

34. [53]

    For those reasons, the Builder has failed to establish that the first Security Recourse Event on which the Principal relies is not available.

Second Security Recourse Event – failure to comply with a material obligation

1. [54]

   The second Security Recourse Event on which the Principal relies is that the Builder has “failed to comply with a material obligation under the Contract”.

2. [55]

   Under cl 2.1 of the Contract, the Builder’s fundamental obligation is to “carry out and complete the WUC”, being “the work under the Contract”.

3. [56]

   “WUC” is defined to mean:

4. [57]

   By cl 2.2(h) of the Contract, the Builder warranted to the Principal that:

5. [58]

   In its letters of 4 February 2020, giving notice of its intention to call on the Guarantee, the Principal nominated nine clauses of the Contract said to impose on the Builder “material obligations” with which it had failed to comply.

6. [59]

   In its written submissions, the Principal focussed on cl 2.2(h). There was no dispute before me that the Builder’s obligations under cl 2.2(h) were “material obligations” for the purposes of cl 5.2(a)(ii).

7. [60]

   Mr Miller emphasised in submissions that the Builder’s obligation to “execute the WUC in a proper and workmanlike manner” for the purposes of cl 2.2(h) included an obligation to carry out “remedial work”. Mr Miller pointed out that under cl 35 of the Contract (which deals with “Defects Liability”) the Builder must rectify defects existing at the date of practical completion, as well as those identified by the Superintendent during the defects liability period.

8. [61]

   Mr Miller submitted:

9. [62]

   Mr Miller pointed to cl 37.5 of the Contract which provides for the issue of a “Final Certificate” on “the completion of all obligations of the [Builder] under the Contract”.

10. [63]

    It may be that it cannot yet be determined whether the Builder has “carried out and completed” the WUC in accordance with its obligations under cl 2.1 of the Contract, nor whether the Builder has completely executed the WUC in accordance with its obligations under cl 2.2(h) of the Contract. But it does not follow that the Builder has hitherto complied with its obligations under cl 2.2(h).

11. [64]

    That is because that obligation included “the work which the [Builder] is required to carry out and complete under the Contract” as well as any “remedial work” that might be required by reason of shortcomings in work done earlier.

12. [65]

    As Hammerschlag J said in Owners of Strata Plan 80458 v TQM Design & Construct Pty Ltd [2018] NSWSC 1304 at [194], in the course of rejecting the “temporary disconformity theory” contended for in that case:

13. [66]

    Part of the work that the Builder was obliged to “carry out and complete” under cl 2.1 of the Contract and thus to “execute the WUC in a proper and workmanlike manner” for the purposes of cl 2.2(h) was to ensure that the WUC reached practical completion by the date for practical completion; that is, as at 8 August 2018.

14. [67]

    That obligation was imposed by cl 34.1 of the Contract. That clause was not nominated by the Principal in its 4 February 2020 letter but is necessarily related to the nominated obligation under cl 2.2(h).

15. [68]

    “Practical Completion” is defined in the Contract as “that stage in the carrying out and completion of the WUC” when the “Works” (defined to mean the “work to be carried out and completed in accordance with the Contract”) are “complete and fit for use occupation except for minor defects”.

16. [69]

    It is now clear that the Builder did not comply with that obligation. The “Works” were not fit for use and occupation as at 8 August 2018. The residents were evacuated a few months later because of defects that must have been present at the date of practical completion.

17. [70]

    This was a failure by the Builder “to comply with a material obligation of the Contract”.

18. [71]

    Mr Miller submitted that an inquiry into the question of whether “Practical Completion” as defined in the Contract, had in fact been achieved, was now foreclosed because the Superintendent had given under cl 34.6(b) a “certificate of practical completion evidencing the date of practical completion”.

19. [72]

    Mr Miller referred to the decision of the Court of Appeal in Abergeldie Contractors Pty Limited v Fairfield City Council [2017] NSWCA 113 at [40]-[47]. In that case Basten JA, with whom Beazley ACJ and Meagher JA agreed, held that the issue of a certificate of completion by a superintendent, under a clause materially the same as cl 34.6(b)(i) of the Contract, was conclusive evidence of when the date of practical completion had occurred. That has important consequences for such matters as the commencement of the defects liability period under cl 35 of the Contract and the Principal’s entitlement to liquidated damages under cl 34.7.

20. [73]

    Thus, as Mr Braham accepted, the certificates are conclusive evidence that the date of practical completion in this case was 8 August 2018.

21. [74]

    But the certificates under cl 34.6(b) cannot be determinative of whether, as a matter of fact, the requirements for practical completion were in fact achieved by the date of practical completion. Nor can they operate to waive or release any breach of the Contract by the Builder which then existed. I think Mr Braham was correct to submit that the phrase “practical completion” is a reference to the underlying condition of the building, namely being “complete and fit for use and occupation except for minor defects”: see [68] above. This is to be contrasted with the phrase “date of practical completion” which is a reference to a date fixed by the Superintendent and which, as I have said, sets time running in relation to other aspects of the Contract.

22. [75]

    The evidence before me points strongly to the conclusion that, notwithstanding the certificate givens the by Superintendent as to the date of practical completion, practical completion had not in fact then occurred.

23. [76]

    As the Builder needs to establish a negative stipulation, namely that the Principal is not entitled to recourse to the Guarantee, it is for the Builder to establish that it has not failed to comply with a material obligation under the Contract and thus, relevantly, that it had complied with its obligations under cl 2.2(h) and, thus, its obligations under cl 34.1.

24. [77]

    In my opinion, it has not done so.

25. [78]

    Accordingly, the Builder is not entitled to restrain the Principal from calling on the Guarantee on this basis.

Damages not shown to be an inadequate remedy

1. [79]

   In any event, even if I am wrong in coming to the above conclusions, I would not grant the Builder the injunctive relief it seeks because I am not satisfied that the Builder has shown that damages would not be an adequate remedy.

2. [80]

   Campbell JA observed in Lucas Stuart v Hemmes Hermitage at [5]:

3. [81]

   Usually, in a case where a contractor seeks to restrain a principal from calling on a bank guarantee, the contractor can point to the prospect of reputational damage likely to occur were it to become known that such a call had been made.

4. [82]

   Thus, in Lucas Stuart v Hemmes Hermitage Macfarlan JA said at [45]:

5. [83]

   Ms Michelle Knight, employed by the solicitors for the Builder, has given evidence on information and belief that if the Principal were to have recourse to the Guarantee this would:

6. [84]

   But here, regardless of the outcome of these proceedings, there will be no call on the Guarantee. That is because, as set out at [4] above, the Principal has agreed to accept a cash payment from the Builder in lieu of calling on the Guarantee and has undertaken not to call on the Guarantee if such cash payment is provided.

7. [85]

   Although Mr Miller submitted that payment of $3.9 million would be “an obvious impost on any person or entity in business” there is no suggestion, let alone evidence, that the Builder cannot provide such a payment. Nor is there any evidence that the making of such a payment would have any adverse impact on its operations.

8. [86]

   Mr Miller drew attention to authority to the effect that in the case of a breach of a negative covenant in a contract “the correct approach is to grant the injunction unless there are good reasons to the contrary”: Maggbury Pty Ltd v Hafale Australia Pty Ltd (2001) 210 CLR 181; [2001] HCA 70 at [102] (Callinan J). In my opinion, the matters set out in the previous paragraph and at [4] constitute “good reasons to the contrary”.

9. [87]

   I find this to be a further reason to decline to give the Builder the relief it seeks.

Conclusion

1. [88]

   The proceedings should be dismissed.

2. [89]

   I shall hear the parties as to costs.