Advanced Constructions Pty Ltd v Lainson Holdings Pty Ltd

The background to this matter is as follows.

Advanced Constructions Pty Ltd (“Advanced”), the plaintiff, for whom Mr I. G. Roberts SC with Mr J. Adamopoulos appear, is a builder. On 17 May 2017 Advanced entered into a construction contract (the “Contract”, which includes the “Formal Instrument of Agreement” and the “General Conditions”) with Lainson Holdings Pty Limited ("Lainson") pursuant to which Advanced agreed to construct a building at a site in Cronulla owned by Lainson. It was a term of the Contract that Advanced provide two bank guarantees (the “Bank Guarantees”) in favour of Lainson, each of $706,250, as security for Advanced's performance under the Contract. Advanced provided the Bank Guarantees as required.

During the course of construction, Lainson and its financier, PT Ltd (“PT”), entered into the Contractor Tripartite Deed – Cronulla (the “Tripartite Agreement”) with Advanced: see the Court Book p. 101 (the “CB”, also referred to as “Exhibits A1 and A2” – all CB page references are to Exhibit A2 unless specified otherwise). The Tripartite Agreement modified the Contract and required Advanced to give notice of default by Lainson to PT.

PT appointed receivers and managers in respect of Lainson's property on 5 December 2018. On 14 December 2018 the receivers notified Advanced (CB 219) that they would not adopt the Contract, that they had taken possession of the site and that the receivers understood that Lainson was not able to perform the Contract (see CB 161). Advanced was given access to the site for the purpose of retrieving its plant and equipment.

On 19 February 2019 Duffy Kennedy Pty Ltd applied to this Court to wind up Lainson. The hearing has been delayed several times. I understand it has been fixed for hearing on 7 August 2019.

On 11 March 2019 Advanced wrote to PT, through its solicitors, enquiring whether PT intended to remedy breaches of the Contract and on the Tripartite Agreement (see CB 220). The response was that PT did not intend to do so (see CB 224).

On 20 March 2019 Advanced gave notice to Lainson and a superintendent appointed under the Contract that it had terminated the Contract on the basis of insolvency provisions set out in cl 39.11 of the General Conditions. Advanced relied on three sub-cls of 39.11, namely (d)(iii)-(iv) and (vii), which are as follows:

It is noted in 39.11 that:

Sub-cl 39.9 gives the right to the contractor to terminate the Contract. There are two other provisions which I should mention in the General Conditions, which are of relevance. The first is cl 40, headed “Termination by frustration”:

Also relevant is cl 5 of the General Conditions, of which 5.1 and 5.2 are in the following terms:

Reference should also be made to cl 4.1 of the Formal Instrument of Agreement (which forms part of the Contract, together with the General Conditions) titled Bank Guarantee (CB 2):

Advanced relies on these provisions and claims that it has validly terminated the Contract and is entitled to return of the Bank Guarantees.

In the alternative, Advanced asserts that the Contract has been frustrated and relies on that as a separate basis for the return of the Bank Guarantees.

After this litigation was commenced by Advanced, Advanced agreed to replace what were then the existing Bank Guarantees with two new guarantees on two separate occasions because the previously provided guarantees were due to expire. That step was taken to preserve claims of Lainson that Lainson was entitled to retain the Bank Guarantees. It was for this reason that today Advanced needed to file a Further Amended Summons and a Further Amended Technology and Construction List Statement to refer to the most recently provided Bank Guarantees (which are due to expire in August).

Lainson, on 18 April 2019, filed a response to Advanced’s Technology and Construction List Statement raising various issues, to which I will return. Advanced filed a reply to that, raising the frustration of contract point. Orders were made for the filing of evidence by the parties, with which the Plaintiff complied but Lainson failed to file any evidence. Further orders were made for the filing of evidence by Lainson but, notwithstanding a number of opportunities to do so, Lainson has filed no evidence. It should also be noted that in these proceedings not only has Lainson not put on any evidence in support of its claim, as required by the orders made by this Court, but neither the lender nor the receivers have ventured forth to resist Advanced’s demand for the return of the Bank Guarantees.

On 21 June 2019, a solicitor on behalf of Lainson appeared at a directions hearing and indicated that he had filed a Notice of Ceasing to Act and was no longer acting for the company. His Honour Hammerschlag J ordered that notice be given of this hearing date, after it was fixed, to the director of Lainson, which order was complied with. Today Mr Charles Lainson, a director and shareholder of Lainson, sought, initially, to appear on behalf of the company and to file a Notice of Motion for an adjournment of the proceedings but, after the matter was ventilated for some time, he decided that he would not proceed with the application for leave to appear on behalf of the company and to have the proceedings adjourned.

The only evidence that is contained in the CB is the evidence, therefore, of the Plaintiff.

One issue which was ventilated in Lainson’s List Response was the question of whether or not the right to terminate could be exercised by Advanced without it having to wait for 28 days to expire. Lainson's argument appeared to be that the constraints imposed in cl 39.9 of the General Conditions had to be met if Advanced wanted to rely on cl 39.11. I do not think this is correct. It is clear by the terms of cl 39.11 that insolvency is to be treated quite differently from other reasons for terminating and the right to terminate for insolvency is not subject to the requirement for notice to show cause imposed by cl 39.7 and 39.9. There was no requirement, therefore, to wait 28 days. Notice was given by the Plaintiff to the Defendant and its solicitors, and to the receivers on behalf of the lender (see CB 220 to 234).

There is another issue which arises from the List Response which is to be found at C7 of the List Response filed and found at CB 17-18, which refers to particulars in relation to cl 5.2 of the General Conditions and a reference to what is described as a pending claim of $1.13 million approximately. These particulars acknowledge (see C7 sub-para (d)) that the terms of the Contract dealing with claims for which recourse could be had to the Bank Guarantees are dealt with in 5.2 of the General Conditions. There is no evidence that any notice was given by Lainson to the Plaintiff in relation to recourse as required by cl 5.2. Furthermore, no evidence has been filed on behalf of Lainson in support of what is alleged in the List Response. It would have been necessary, if this was to be promoted as a reason to resist the return of the Bank Guarantees, for Lainson to provide all the relevant documentation in support of its claim and also for evidence of notice having been given. Nothing has been provided. Accordingly, Lainson has not supported its claim to resist the return of the Bank Guarantees.

Advanced has established that it has validly terminated the Contract. The next question is whether that leads to the conclusion that the Bank Guarantees must be returned. It appears that the Contract does not expressly provide that the Bank Guarantees are to be returned following valid termination by Advanced for insolvency (in contrast to where the Contract has been terminated by frustration: see cl 40(c)) but Advanced contends that it is implicit from the terms of the Contract that they ought to be returned and calls in aid of that contention two matters. First, Mr Roberts refers to Eddy Lau Constructions Pty Ltd v Transdevelopment Enterprise Pty Ltd [2004] NSWSC 273 at [94] where Barrett J (as his Honour then was) held that, whilst there was no express provision in the Contract as a source of right to have the Bank Guarantees returned, no basis had been advanced by the parties seeking to retain the Bank Guarantees. That is the position here. Mr Roberts also refers to cl 4.1 of the Formal Instrument of Agreement which I have earlier set out at [11] above, and submits that those terms support the conclusion that if the conditions required for recourse have not been met under the Contract the Bank Guarantees should be returned. I accept that the parties must be taken to have accepted that valid termination of the Contract would require return of the Bank Guarantees unless the right to call upon the Bank Guarantees had already accrued.

In any event, I am satisfied that the Contract has been terminated by frustration. It is not possible for the Contract to be performed and has not been possible since the date that the receivers sold the site on which the building was to be constructed. It was sold to Jingle Pty Ltd on 4 April 2019 (see CB 244). Even if the Contract had been not terminated validly by Advanced as at that date, the Contract could no longer be performed and was frustrated. In Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696, Lord Radcliffe at 729 described “frustration” thus:

I recognise there might have arisen a question as to whether the fact that the site was sold due to Lainson’s financial position should be regarded as a situation of “without default”, but there are several answers to such a contention:

In these circumstances, either basis is sufficient for the Plaintiff to succeed for the return of the Bank Guarantees and I make orders in accordance with paras 1, 2, 3, 5 and 6 of the Further Amended Summons.