20 May 2020

Bank Guarantees and Adjudications

Tony Mylne
Tony Mylne Litigation Lawyer

Case Study

Grocon (Belgrave ST) Developer Pty Ltd (Grocon) v Construction Profile Pty Ltd (CP)

This Supreme Court of NSW decision by Justice Ball has interest for both claimants and respondents and deals with a circumstance where guarantees are called upon by the principal to satisfy a claim for liquidated damages and how a claimant might deal with that circumstance.

Facts

CP was engaged by Grocon to construct an apartment block at what is referred to as the Telstra Exchange at Manly for an amount of approximately $21 Million. CP made a Payment claim for $3.22 million. Grocon provided a payment schedule for $-1.36 million allowing only $29,500.04 for works but setting off liquidated damages of $1.655 million.

An adjudicator allowed various extensions of time and allowed an adjudicated amount of $1.264 million.

There were two bank guarantees just shy of $1 million in total which was called in by Grocon. Grocon paid the adjudicated amount. PC then issued a further payment claim effectively trying to “cover the liquidated damages under the contract”.

Grocon sought injunctive relief prior to the second adjudication application proceeding as it claimed the adjudicator could not have jurisdiction as essentially the claims to cover liquidated damages can’t be construction work or related goods or services and as a result cannot be the subject of adjudication.

Issues

  1. Whether a claim to cover liquidated damages was construction work or related goods or services.
  2. Whether responses of CP could be sustained:
    • The question can be determined by adjudicator;
    • It is a claim for construction work as it includes the value of the whole of the work undertaken less the amount it had been paid;
    • Clause 42.8 of the general conditions of the contract (allowing set-off) is rendered void by reason of section 34 of the SOP act (dealing with anti-avoidance provisions).

3.Whether the right to call on the guarantee modified or restricted operation of the Building and Construction Industry Security of Payment Act (the Act).

While the issue at paragraph numbered 3 above, was not a matter raised by the parties explicitly and the matter was not decided on this point, there were some very interesting comments that might give rise to further arguments in future for claimants.

Result and takeaways

Dealing with the first issue raised the court was strongly of the view that the claim was not for construction work or related goods and services. While an adjudicator may address issues of jurisdiction to deal with matters raised, jurisdiction is ultimately a question for the court and not the adjudicator. While normally these issues of jurisdiction might be dealt with by a court following a determination by an adjudicator in an appropriate case it can be determined in advance of any adjudication by application to the court. As in this case, it was appropriate for a court to consider these issues where it was contended that the whole or a substantial part of the claim falls outside of the Act.

The court also took little time to deal with the second of CP’s claims as it was plainly not construction work. While some claims were available, they were comparatively small in nature and didn’t provide a sufficient basis for refusing relief to Grocon.

The Court in relation to the third issue, criticised the CP submission in that it focused on clause 42.8 (sett off) of the contract. The court found that Grocons claim to the bank guarantees did not depend on the right of set-off but rather CP’s real complaint was that Grocon called on the guarantees even though the adjudicator determined that it had no claim for liquidated damages. The court suggested that a more successful submission might have been that the effect of the provisions of the contract permitting Grocon to call on the guarantees regardless of the determination of adjudicator, was to modify or restrict the operation of the Act, therefore, making those provisions void under the anti-avoidance provisions. It could be said the effect of these provisions was to reduce the amount that CP was entitled to recover on an interim basis as a consequence of the adjudicator’s determination.

The court made the comment that it saw no reason why an adjudicator could not adjust to take into account bank guarantees called upon should there be a conflict between the adjudicator’s decision on liquidated damages and the claims of the principal.

The method of dealing with this issue by the contractor was ineffective according to Ball J. and it seems the contractor would have been much better challenging the call on the bank guarantees by seeking injunctive relief.

The court was not directly required to deal with the calling in of the guarantees and as a result, Grocon succeeded in its challenge and an injunction was granted stopping the second adjudication.

Takeaways

The court will likely consider a challenge to jurisdiction prior to the adjudication in the appropriate circumstances that might include, avoiding large costs of a defective application, and where it is clear that jurisdiction is lacking.

Timing and consideration of when to call in a guarantee or when to challenge such an action are crucial to the success of either side.

If you would like to discuss this article and its implications on your business, please contact Tony Mylne from our Construction Litigation team.

 


Individual liability limited by a scheme approved under professional standards legislation (personal injury work exempted).

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