28 October 2019

Provision of security is an ongoing obligation

This article is written by Scott Watson and Lucinda Everson.

The Supreme Court of Queensland recently considered whether a builder was obliged to provide replacement security in circumstances where the security previously provided had expired. The application concerned the proper construction of a number of provisions of AS2124-1992. In this instance, the security expired after the Date of Practical Completion, but before the expiry of the defects liability period. The decision also considered the effect on these provisions of the principal’s prior acceptance of the form of security that was not strictly in the form required by AS2124-1992.

The decision of Justice Mullins in CCIG (Australia) Pty Ltd v Amicus Hospitality Group Pty Ltd [2019] QSC 232 is outlined below. It reminds builders that the provision of security in the contractually approved form is an ‘ongoing obligation’, not a once-and-for-all obligation.  It also reminds contract administrators of the importance of verifying the form of security provided carefully, which in this instance may have avoided recourse to the Courts in the first place.

Facts

The applicant owned and operated Daydream Island Resort and Spa. It entered into a contract dated 29 November 2017 with the respondent to carry out building work for the refurbishment and upgrade of the resort. The contract was an amended version of AS2124-1992.

The contract required the respondent to provide two bank guarantees. The first expired on 31 July 2018 and (Bank Guarantee 1). The second expired on 31 July 2019 (Bank Guarantee 2). At no time prior to 1 August 2019 did the owner raise with the builder any issue about the expiry dates in the bank guarantees not conforming with the requirements of the relevant clause of the general conditions.

A brief timeline of key events is outlined below.

Date

Event

29 November 2017

Date of contract.

18 January 2018

Builder provided Bank Guarantee 1 and Bank Guarantee 2.

31 July 2018

Bank Guarantee 1 expired.           

30 October 2018

Date for practical completion of Separable Portions 1A and 1B.

3 December 2018           

Date for practical completion of Separable Portion 2.

7 March 2019

Date of practical completion. 

31 July 2019

Bank Guarantee 2 expired. 

1 August 2019

Owner requested that the builder provide an unconditional bank guarantee in substitution for the expired bank guarantee (Bank Guarantee 3).

11 September 2019           

Application heard by Supreme Court.

At the hearing on 11 September 2019, the owner contended that the builder was obliged, under the contract, to provide Bank Guarantee 3. The builder submitted that there was no obligation under the contract to do so, because it had satisfied its obligations by providing Bank Guarantees 1 and 2, the owner had not previously taken issue with the form of those two guarantees, and the owner had paid all sums under the Contract such that is should be treated as have been discharged.

Decision

Mullins J found that the owner was entitled to a declaration that the builder was obliged to provide the owner the further security.  The Court found that the provision of this security was an ongoing obligation to secure the due and proper performance of the Contract by the builder until 14 days after the issue of a Final Certificate.  The fact that the owner had previously accepted Bank Guarantees 1 and 2 in a form not approved by the Contract (ie because they had expiry dates) did not alter this conclusion.

In arriving at this decision, her Honour emphasised the following:

(a) The relevant clause of the general conditions gave the owner the discretion to approve or disapprove the form of the back guarantees proffered by the builder. The contract did not provide a time limit for such approval or disapproval.

(b) There was no express provision in the contract for the extension or replacement of the bank guarantees provided as security because the form of the guarantee contemplated by the contract was unconditional without an expiry date.

(c) The obligations to provide bank guarantees was not a once and for all obligation. Consequently, builder was obliged to provide a replacement bank guarantee or it would fail to fully perform its obligations under the contract.

(d) The fact that some time had passed after the breach of the builder’s obligation to provide the replacement security without the owner taking any action did not preclude the owner from now seeking to enforce the builder’s obligation to provide the security.

(e) The recent Victorian decision in PHHH Investments No 2 Pty Ltd v United Commercial Projects Pty Ltd (No 2) [2018] VSC 92 was distinguished from the facts in this instance case on the following grounds:

(i) The contract this instance contained an express provision which provided that any payment of moneys was not approval by the owner of the builder’s performance or compliance with the contract. That is the builder was no able to point to the complete payment of the contract sum as having discharged the Contract. The contract in PHHH Investments did not contain such a clause.

(ii) In PHHH Investments the builder had specifically rejected the first set of bank guarantees, and received replacement guarantees. Implied approval of the replacement guarantees could be inferred from this conduct. There was no such conduct in this instance.

Key contacts

A Guide to Investing in Australian Real Estate

Investing Down Under offers a quick overview of the legal, taxation, FIRB and structuring issues you may encounter when investing in Australian real estate.

Share on LinkedIn Share on Facebook Share on Twitter
    You might also be interested in

    On 1 December 2019 new provisions contained within the Conveyancing Legislation Amendment Act 2018 and associated Regulations came into effect. The new laws require a vendor of residential property...

    04 December 2019

    The Supreme Court of Victoria has considered whether an insured buyer under a warranty and indemnity (W&I) policy is entitled to indemnity from an insurer in circumstances where it relied on income...

    13 November 2019

    The Convention on the Recognition and Enforcement of Foreign Judgments in Civil or Commercial Matters (Convention) has been described as a “game-changer” in international dispute settlement.

    31 October 2019

    On 9 October 2019, the High Court of Australia published their reasons in the much awaited decision in Mann v Paterson Constructions Pty Ltd [2019] HCA 32, a case concerning a dispute over the...

    14 October 2019

    Legal services for your business

    This site uses cookies to enhance your experience and to help us improve the site. Please see our Privacy Policy for further information. If you continue without changing your settings, we will assume that you are happy to receive these cookies. You can change your cookie settings at any time.

    For more information on which cookies we use then please refer to our Cookie Policy.