Kell & Rigby Holdings Pty Limited v Lindsay Bennelong Developments Pty Ltd

HIS HONOUR : The plaintiff is a builder. The defendant is a property developer.

On 2 October 2007, the defendant (as Principal) and the plaintiff (as Contractor) entered into a construction contract (“the Contract”) under which the plaintiff was to build for the defendant a mixed commercial and residential development at Rushcutters Bay, Sydney. Originally, the project involved three stages. The fourth stage was omitted by later agreement. Stages 1 and 2 are complete. Stage 3 is not yet complete. It comprises two buildings described respectively as Building D and Building E, together with ancillary works.

In addition to being the Principal, the defendant is appointed Superintendent under the Contract. Mr Jeremy Bryden, the defendant’s Development Director, has at all material times exercised the functions of the Superintendent on the defendant’s behalf.

The Contract contains provisions for variations and certifications, including as to Practical Completion. The provisions which are relevant to the current dispute are reproduced in Schedule A to these reasons.

Mr Bryden certified Practical Completion of Stage 1 on 24 November 2008 and Stage 2 on 3 December 2009.

On 8 December 2009, the parties entered into an agreement styled Advance Payment Deed (“the Deed”). By the Deed the defendant agreed to advance to the plaintiff part of the balance of the original contract sum. The Deed inserted a new cl 42A into the Contract. It also amended cl 47, the Dispute Resolution provision.

References below to clauses are, unless otherwise stated, references to clauses in the Contract as varied by the Deed. The whole of cl 42A is reproduced in Schedule B to these reasons.

Pursuant to cl 42A.1 the plaintiff requested, and received from the defendant, Advance Payment of $2 M. As required by cl 42A.3(a) the plaintiff provided two Advance Payment Bonds each in the form of an unconditional Bank Guarantee from the Commonwealth Bank of Australia (“the Bank”) dated 20 November 2009 in the amount of $1 M (“the Guarantees”).

The Advance Payment has not been repaid.

Under cl 42A.4(d): (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; (ii) the date of termination of the Contract; (iii) the date the Principal takes the work out of the Contractor's hands under clause 44.4(a), whichever occurs first, the whole of the balance of all Advance Payments then outstanding shall immediately become a debt due and payable by the Contractor to the Principal.

By May 2010, the parties were in dispute. The defendant asserted that the plaintiff was not performing under the Contract and had not paid subcontractors. It was dissatisfied with information the plaintiff was providing about moneys owed to subcontractors. It was avowedly concerned about the plaintiff’s solvency. In turn, the plaintiff claimed that moneys were owing to it and were overdue, and that this was the reason it had not paid subcontractors.

As at 31 May 2010, according to the unchallenged evidence of Mr Bryden, Building D had not reached a stage in which it was “in settleable form” – meaning that sales to purchasers could not be settled. Work which still needed to be done for the building to reach that state included some external façade works, fit out of the lift, carpeting of common areas and completion of the lobby including the entry ramp and tiling. Additionally, there were works outstanding relating to the car park, loading areas and ancillary plant rooms for it and Building E. Building E itself was in an even less complete state. Work needed to be done to complete Building E included concrete formwork to complete stairs, installation of balustrades of stairs, completion of structural steel balconies to certain apartments, installation of doors to certain apartments, installation of door handles, tiling of certain kitchens and balcony floors, installation of joinery in certain apartments, installation of fire extinguishers, completion of fire ceiling works, installation of drain downs and sprinklers required in certain areas, commissioning of the fire protection services, installation of external glazed shopfronts, rendering of certain areas and removal of rubble.

On 21 June 2010, Mr Bryden issued, in immediate succession, two instruments each on the defendant’s letterhead.

The first was a “Notice of Variation to Works” in the following terms: NOTICE OF VARIATION TO WORKS Clause 40.1.13 In accordance with Clause 40.1.13 of the General Conditions of Contract , you are hereby notified that the following work has been deleted from the Works by way of variation or omission: Stage 2 – all incomplete works regarding the Advanx building, all external works (including common areas); and Stage 3 – the balance of the works for the car park, loading areas, ancillary plant rooms, buildings D and E, and any other work yet to be performed under the Contract including any rectification work not otherwise notified. Yours faithfully, Superintendent

The second was a “Certificate of Practical Completion” in the following terms: CERTIFICATE OF PRACTICAL COMPLETION Clause 42.3.5 In accordance with Clause 42.3.5 of the General Conditions of Contract , the Superintendent herby certifies that Practical Completion of Stage 3 was achieved on 21 June 2010. Further, in accordance with Clause 42.3.5 of the General Conditions of Contract , the Superintendent hereby certifies that Practical Completion of the Works was achieved on 21 June 2010. The Date for Practical Completion of Stage 3 is 31 March 2010. Practical Completion was achieved on 21 June 2010. Liquidated Damages apply as set out in Clause 35.6 of the Contract. The liquidated damages for Stage 3 amount to $567,000 being 81 days at the rate of $7,000 per day. Yours faithfully, Superintendent

The defendant then almost immediately made demand on the Bank for the full amount of the Guarantees on the basis that 21 June 2010 was the date of issue of the Certificate for Practical Completion for Stage 3 so that the balance of all Advance Payments then outstanding then immediately became a debt due and payable to it under cl 42A.4(d)(i).

The Bank took the position (and informed the defendant which in turn entirely properly informed the plaintiff) that if it was not restrained by the Court by 5.00pm that day, it would pay. Before any payment was made, the plaintiff urgently moved for and obtained an interim injunction restraining the defendant from making demand under the Guarantees, or if it had already done so, requiring it to withdraw any demand. The matter was set down for final hearing on an urgent basis. THE PARTIES’ CONTENTIONS

Mr G Inatey SC together with Mr D Miller of counsel appeared for the plaintiff.

The plaintiff put that the defendant should be restrained from calling on or being permitted to call on the Guarantees because: a there is to be implied into the Contract a negative stipulation that the defendant will not call on the Guarantees to effect repayment of an Advance Payment if repayment is not due; b the Certificate of Practical Completion issued by the Superintendent on 21 June 2010 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 the defendants on the Guarantees is accordingly in breach of the negative stipulation and falls to be restrained.

It put that the Certificate of Practical Completion was invalid or vitiated because: a clause 42.3.5 which authorises the Superintendent to issue such a Certificate of Practical Completion has no operation unless and until the matters “called-up and the steps mandated” by cl 42.3.1, cl 42.3.2 and cl 42.3.3 have been satisfied or there has been a failure on the part of the Contractor to give the notices under cl 42.3.1 and cl 42.3.3 and the Superintendent has formed the requisite opinion under cl 42.3.5; b in purporting to give and issue respectively the Notice of Variation to Works and Certificate of Practical Completion the defendant, in breach of cl 23.1(a), did not exercise its functions, or failed to ensure that in the exercise of its functions it acted fairly because it acted for an impermissible purpose and in its own interests without regard for those of the plaintiff.

In the alternative, it put that the Certificate of Practical Completion should be set aside under the provisions of s 87 of the Trade Practices Act 1974 (Cth) (“the Act”) on the grounds that in issuing it the defendant engaged in unconscionable conduct in contravention of s 51AA of the Act, which provides that a corporation shall not, in trade or commerce, engage in conduct that is unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories.

Mr I G B Roberts of counsel appeared for the defendant.

The defendant put firstly that it was 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 on the part of the defendant to make demand. It put that the Contract contains no express or implied negative stipulation to the effect that the defendant would not do so even if the Advance Payment was not repayable. It put that the Contract evinces an allocation of risk that in the event of a dispute it would be the Contractor who would be out of pocket.

Secondly, the defendant put that: a under cl 40.1.3 the Superintendent is empowered to vary the Works by deleting therefrom any part of them and that what was left then became the Works within the definition of that term in cl 2; b the Notice of Variation to Works was a valid exercise of that power; c upon that Notice of Variation to Works being given the Works were fully complete and full completion must comprehend and include Practical Completion which was thereby achieved; d the Certificate of Practical Completion was validly given; e 21 June 2010 was the date of issue of the Certificate of Practical Completion for Stage 3 under cl 42A.4(d)(i); f the whole of the balance of the Advance Payment then unrepaid became a debt due and payable by the plaintiff to the defendant so that the defendant became entitled to call on the Guarantees.

The submission that the defendant was unconditionally entitled to call upon the Guarantees even if the Advance Payment was not repayable was, it appeared to me, ultimately only faintly pressed. It is nevertheless necessary to deal with it.

Whether the Contract contains a negative stipulation to the effect contended for by the plaintiff is a matter of the proper construction of cl 42A in the context of the whole of the Contract: see Clough Engineering Ltd v Oil & Natural Gas Corporation Ltd [2008] FCAFC 136 at [77] and the authorities cited there.

For the following reasons I consider that the Contract contains an implied negative stipulation binding the defendant not to call on the Guarantees to effect repayment of the Advance Payment at a time when it is not repayable.

Firstly, although cl 42A.4(a) commences with words “[w]ithout limiting or otherwise affecting the Principal’s right to have recourse to any Advance Payment Bond (including in accordance with clause 42A.5(b))” and cl 42A.5(b) commences with the words “[w]ithout limiting or otherwise affecting any other right the Principal may have to have recourse to any Advance Payment Bond”, cl 42A.4(d) legislates in express terms for only three instances in which the outstanding balance of all Advance Payments becomes a debt immediately due and payable. One is the issue of a Certificate of Practical Completion for Stage 3.

Secondly, cl 42A.4 and cl 42A.5 refer to the Principal’s right to have recourse to any Advance Payment Bond. They do not refer to circumstances where such a right is only asserted, rather than established.

Thirdly, there is no provision in the Contract which indicates that payment must be made notwithstanding the pendency of a dispute. The only obligations which cl 47.1 (which was amended by the Deed in respects not presently relevant) requires the parties to continue to perform notwithstanding the existence of a dispute are that the Contractor continue with the Work and that the Principal comply with cl 42.1 (payment of certified claims): cf Clough Engineering Ltd v Oil & Natural Gas Corporation Ltd at [54]-[57].

Fourthly, an Advance Payment Bond is provided only when an Advance Payment is made and then to the same value. This 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.

The plaintiff having put the question of the defendant’s entitlement in issue by taking these proceedings to enjoin its claim on the Guarantees, the question of its entitlement in fact is to be addressed in the proceedings: Reed Constructions Services Pty Ltd v Kheng Seng (Australia) Pty Ltd (1998) 15 BCL 158 at 166.

The defendant does not put that the Advance Payment is or became repayable for any reason other than the issue of the Certificate of Practical Completion. It follows that if there is no valid Certificate of Practical Completion, the Advance Payment is not presently repayable.

There is no issue that immediately before the Notice of Variation to Works, the state of the Works was such that Practical Completion had not been reached within the meaning of cl 2, or that but for the Notice of Variation to Works that stage would even have been reached. The evidence made it clear that the purpose of giving the Notice of Variation to Works was to bring about Practical Completion.

The first issue for consideration is whether, in the circumstances which occurred, cl 42.3.5 was capable of operation so as to permit the Certificate of Practical Completion to be given.

The defendant submitted that cl 42.3.5 entitled it (as Superintendent) to certify Practical Completion if it formed the opinion that that stage had been reached and that having removed all remaining contract work, there was nothing left for the plaintiff to do under the Contract. Hence the Works were practically complete. It put that cl 42.3.5 does not depend on any event occurring as described in cl 42.3.1 or 42.3.3 and that there is no reason to read cl 42.3.5 down.

The defendant did not put that the Certificate of Practical Completion could or should stand if the purported removal of all remaining contract work was ineffective. This was presumably because it accepts that it could not honestly and fairly have formed the opinion that Practical Completion had been reached if the variation which it itself made to bring about that state, was beyond its authority to make.

I turn then to whether the defendant (as Superintendent) acted beyond its power in giving the Notice of Variation to Works.

The Superintendent’s power to vary the Works must be found within the express terms of the Contract. No implied power is suggested.

The defendant identified only cl 40.1.13 as the source of the power. That provision empowers the Superintendent to vary the Works by deleting therefrom any work that the Superintendent may specify.

The meaning of the words used in the Contract is to be determined by what a reasonable person would have understood them to mean. This requires consideration of the language used, the surrounding circumstances known to the parties, the purpose of the transaction and the objects which it was intended to secure: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 179; International Air Transport Association v Ansett Australia Holdings Ltd (Subject to Deed of Company Arrangement) and others (2008) 242 ALR 47 at [8].

The Contract is to be given a business-like interpretation. The nature and extent of the commercial aims and purposes of the Contract or parts of it are part of the essential background circumstances: McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 at 589; Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 at 350. See too the summary of principles in Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407 at [19] and following.

Clause 40.1.13 is to be construed not on its own but as part of the Contract as a whole. Preference is given to a construction supplying a congruent operation to the various components of the whole of the Contract: Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522 at 529.

The Superintendent’s power to vary the Works by deletions is undoubtedly a wide one but it is not unlimited.

Clause 2 defines Works to mean the whole of the Work to be executed in accordance with the Contract including variations provided for by the Contract, which by the Contract is to be handed over to the Principal.

Clause 2 also defines Practical Completion relevantly to mean that stage in the execution of the work under the Contract when the Works are complete except for minor omissions and minor defects which do not prevent the Works from being reasonably capable of being used for their stated purpose .

The power given to the Superintendent under cl 40.1.13 is and remains a power to vary or amend the Works which the Contract contemplates. As cl 2 makes clear, the Contract contemplates the Works being something which have a stated purpose and which will when practically complete be reasonably capable of being used for that purpose.

The Contract does not provide a definition of the words “stated purpose”. However, a consideration of the contractual documents makes it abundantly clear that the stated purpose of the Works is use as multi-storey commercial and residential buildings. This appears amongst others from the following documents which are incorporated into the Contract: the Scope of Works, Design Documents, Architectural Specification and Documents, Development Approval, Pro-forma Sales Contracts and Contract Drawing Schedules.

The defendant put a submission that the “stated purpose” was ambulatory and could be changed by the Superintendent varying the Contract. Thus for example, the Superintendent could vary the Works by deleting everything except the excavations and the stated purpose would become “use as excavations”. In the present case the stated purpose would become “uncompleted commercial and residential buildings”. Leaving aside the plain uncommerciality of it, the submission is unsustainable for at least two reasons. Firstly, the Contract circumscribes the Superintendent’s powers, not the other way around. Secondly, the Contract is properly to be construed as at the date it was entered into and “the Works” is to be given meaning accordingly: Maggbury Pty Ltd v Hafele Aust Pty Ltd (2001) 210 CLR 181 at 188.

The deletions from Stage 3 are of such a profound nature that the partially constructed buildings (if they are considered practically complete in that state) cannot reasonably be used as commercial and residential buildings. Counsel for the defendant accepted as much.

In my view 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.

Moreover, it would not be commercial, sensible or conducive to the congruent operation of the Contract as a whole so to construe that power.

I accordingly find that the variation which the Notice of Variation to Works purported to bring about was unauthorised and was of no force or effect. Consequently, I find that Practical Completion had not been reached. On no honest and fair view of the state of the Works as at 21 June 2010 could the Superintendent have formed the view that the Works were complete except for minor omissions and minor defects which do not prevent the Works from being reasonably capable of being used for their stated purpose. It follows that the Certificate of Practical Completion was also ineffective.

I would not uphold the submission that the Certificate of Practical Completion was unauthorised for want of compliance with the procedures provided in cl 42.3.1 read with cl 42.3.5. In my view all that is required under cl 42.3.5 is that the Superintendent honestly and fairly form the opinion that the Works have reached Practical Completion (as defined in cl 2) in the absence of Notices under cl 42.3.1 having been received. The terms of cl 42.3 do however lend support to the conclusion that Practical Completion cannot be brought about by a variation which changes the fundamental nature of the Works and thereby renders the procedures provided for incapable of implementation.

The plaintiff’s second attack on the Certificate of Practical Completion (in conjunction with the Notice of Variation to Works) is that in giving it, the Superintendent acted unfairly or unconscionably. This attack proceeds on the assumption that the Superintendent had power to issue the Notice of Variation to Works and give the Certificate of Practical Completion.

Clause 23.1(a) provides that the Principal shall ensure that at all times there is a Superintendent and that in the exercise of the functions of the Superintendent under the Contract, the Superintendent acts honestly and fairly. In the present case the Principal and the Superintendent are one and the same person. Thus, it was incumbent on the defendant to act fairly. Clause 23.1(a) is an express imposition of a duty which would anyway ordinarily be imposed on a person in the position of Superintendent: Perini Corporation v Commonwealth [1969] 2 NSWR 530.

If a person in a position of the Superintendent does not act honestly and fairly, his certificate can be ignored: Baulderstone Hornibrook Pty Ltd v Qantas Airways Ltd [2003] FCA 174 at [89]; Hickman & Co v Roberts [1913] AC 229. In Baulderstone Hornibrook Pty Ltd v Qantas Airways Ltd at [89] Finkelstein J said: The circumstances in which a certificate will be vitiated cannot be exhaustively stated. The most recent edition of Hudson’s Building and Engineering Contracts, 11 th ed 1995 by I N Duncan Wallace, suggests the following broad categories: (1) where the decision-maker has a special interest in the result; (2) fraud or collusive conduct; (3) improper pressure, influence or interference by the owner; (4) conduct which falls short of the proper standard of fairness, independence and impartiality; (5) breach of contract or other act or omission of the owner having the effect of preventing the builder obtaining a decision; (6) unreasonable refusal by the decision-maker to consider the matter; and (7) taking improper considerations into account.

The obligation to act fairly in the present context required the Superintendent to exercise his own independent and impartial judgment, to reach a decision without taking improper considerations into account and to take account not only of the interests of the Principal, but also those of the Contractor.

The parties accepted that if, in giving the Notice of Variation to Works and the Certificate of Practical Completion, the Superintendent acted unfairly, those instruments should be regarded as being of no force or effect. It is accordingly not necessary in the present case to consider the juridical basis for why this is so or whether in the circumstances they are void or only voidable. One basis, in this case would be that to give those instruments effect would be to permit the defendant to take advantage of its own wrong contrary to established principle: Alghussein v Eton Establishment [1991] 1 All ER 267.

The fact that the defendant and the Superintendent are in this case the same person does not relieve it from acting fairly to both parties to the Contract: Perini Corporation v Commonwealth . Indeed (as appears below) this case is an illustration of how a party which occupies both roles can easily make the mistake of acting unfairly because of the inherent potential conflict between its duties as Superintendent and its interests as Principal.

For the following reasons I consider that the Superintendent did not act fairly in giving the Notice of Variation to Works and issuing the Certificate of Practical Completion.

Mr Bryden 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.

Mr Bryden took the course he did on the instructions of Mr Campbell, a director of the defendant having discussed it beforehand. In contrast, this course was not discussed with the plaintiff beforehand.

Whilst he had regard for the interests of the defendant and, to the interests of residents of Stage 2, it was not evident that he took any account of the plaintiff’s interests.

In the case of the residents of Stage 2, by bringing about Practical Completion rather than by the defendant terminating the Contract, defects liability obligations on the part of the plaintiff to the residents of Stage 2 were preserved to their benefit and to the plaintiff’s detriment. The appropriate provisions of the Contract pertinent to default (which the defendant was alleging) were not relied upon.

By 14 June 2010 a decision had been taken by Mr Bryden in conjunction with the Principal that the Principal would take over the project. Between then and 21 June the method was determined. Mr Bryden did not consider the Works to be practically complete in a factual sense because he understands and the defendant intends, that the outstanding Work is to be done by another contractor. The course adopted was thus driven by the improper consideration that it was a means by which the defendant as Principal could take over the project rather than a means to bring about appropriate variations to the Works.

Under cross-examination, Mr Bryden gave evidence to the following effect: “Obviously, the performance of the work undertaken in Stage 3. That is the catalyst which determined the course of action. Work not proceeding on [sic] a timely and orderly manner under the contract. The job stalled, if I can just say that, and the threat to us in that respect was that the way the job was performing, it would not necessarily be finished by Christmas, hence forth the issue of settlements, sunset dates and contracts would come into play potentially.”

Mr Bryden went on to accept that he meant by his references to “a threat to us” the threat to the Principal and the Principal’s interests. When asked whether the proposed course of action was discussed with the plaintiff beforehand, Mr Bryden said: “Principals [sic] within its right to vary the Contract down as such”. Thus he saw the variation as an act of the Principal rather than of the Superintendent.

The evidence demonstrated Mr Bryden’s partiality to the interests of the defendant and his descent into the pitfall to which I have earlier referred.

In support of a submission that it did not act unfairly, the defendant put that the plaintiff was not disadvantaged by the Certificate of Practical Completion because: (a) the plaintiff was already late and was at risk for liquidated damages that were accumulating; (b) the plaintiff had outstanding debts to subcontractors that it had not paid from previous progress claims; (c) had the plaintiff been required to continue to complete the contract works as it existed before the variation: i it would have had to pay its subcontractors to have them continue to work; ii it would have had to fund the cost of completing the works; iii it would have had to carry out $2,000,000 at its own cost. [sic] (d) if the work had not been removed the plaintiff would have been in a far worse position.

Even if the plaintiff was not disadvantaged (which the plaintiff did not accept) there was no evidence that these were factors which Mr Bryden took into account in the interests of the plaintiff. Also, the plaintiff put that it found itself in the position it did because the defendant did not pay it what it was due. A finding that the plaintiff was not disadvantaged is not fairly open on the evidence.

I conclude that the Certificate of Practical Completion was vitiated as a result of the failure by the Superintendent to act fairly.

Having found that the defendant (as Superintendent) did not act fairly, it is not necessary to decide whether, in addition, it acted unconscionably in issuing the Notice of Practical Completion. I doubt that it did. It had express contractual obligations which it breached. Absent the breach it did nothing which would have disentitled it from insisting on its rights: see Australian Competition and Consumer Commission v Samton Holdings Pty Ltd and others (2002) 117 FCR 301. The plaintiff’s proper case is one for breach of contract: Tarabay v Fifty Property Investments Pty Ltd [2009] NSWSC 951. It might be that its call on the Guarantees is in the circumstances unconscionable, but the plaintiff did not articulate that case. RELIEF

The plaintiff is entitled to a declaration that in the circumstances that have thus far occurred, the defendant is not entitled to call on the Guarantees. It is also entitled to an injunction, in appropriate terms, in aid of the declaration.

This relief will of course not affect any right the defendant may have to call on the Guarantees if the circumstances which permit it to do so arise.

The parties are to bring in short minutes reflecting this outcome. I will hear them on costs.

The exhibits are to be returned.