Upon:

A.                     The Applicant (through its Counsel) giving the usual undertaking as to damages.

B.                      The Respondent undertaking that account number 035-000 514060 which it maintains with the Westpac Banking Corporation maintain funds not less than $316,500 until 4:30 pm on 16 February 2011.

THE COURT ORDERS THAT:

1.                  The Applicant file and serve further affidavit material on which it proposes to rely at trial by 4:00 pm on 14 January 2011.

2.                  The Respondent file and serve any further affidavit material on which it proposes to rely at trial by 4:00 pm on 7 February 2011.

3.                  The Applicant file and serve any further affidavit material in response by 4:00 pm on 11 February 2011.

4.                  The proceeding be fixed for hearing on 16 February 2011 at 9:30 am on an estimate of one day.

5.                  Costs reserved.

6.                  Liberty to apply.

OTHER MATTERS

The parties agree that it is unnecessary for formal pleadings to be prepared in this matter as the matters in issue are well defined and of limited scope.  The parties have agreed to prepare a joint list of questions to assist the Court in resolving the dispute and will provide the list to the Court prior to the hearing.

Note:     Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

REASONS FOR JUDGMENT

1                     Hansen Yuncken Pty Ltd (“Hansen Yuncken”) was the principal contractor responsible for the construction of an apartment block in Port Melbourne.  Hansen Yuncken engaged the plaintiff (“Structural Systems”) as a sub-contractor on the project.  Structural Systems was to perform concreting, post-tensioning, re-enforcing and form work. 

2                     It was a term of the contract between Structural Systems and Hansen Yuncken that Structural Systems provide security for the proper performance of the contract.  The security was provided by way of two bank guarantees each in the sum of $316,500.

3                     Structural Systems’ work on the project was substantially completed in July 2009.  In the months that followed each party advised the other that it had claims against the other under the contract.  In the event of such disputes arising the contract provided for a process of dispute resolution.  The process, prescribed by Clause 47, commenced with the issue of a notice of dispute.  Representatives of the parties were thereafter to confer and, in the event that their discussions did not resolve outstanding issues, provision was made for mediation and arbitration to settle the disputes.

4                     Structural Systems furnished a notice of dispute to Hansen Yuncken on 20 November 2009.  Hansen Yuncken did not issue its notice until 18 November 2010.  It had, however, between August 2009 and September 2009, issued a payment schedule, a letter alleging defects in the works performed by Structural Systems and a second payment schedule which outlined the substance of the complaint it made against Structural Systems.

5                     On 22 December 2009 a meeting took place between Mr Roy Veal, representing Hansen Yuncken, and Mr David Perry, representing Structural Systems.  This meeting was convened pursuant to the dispute resolution procedure.  At the meeting the issues in dispute between the parties were discussed.  Although the catalyst for the meeting had been the notice of dispute which Structural Systems had issued, Hansen Yuncken’s complaints (or some of them) were discussed.  At the conclusion of the meeting the parties agreed to review their positions in the light of the matters which they had discussed.  It was Mr Perry’s understanding “that after we had each conducted our respective review we would reconvene our meeting to see if we could be able to reach further agreement.”  A resumed meeting was scheduled for after the building and construction industry Christmas shut down.  In the event no such meeting occurred.

6                     Nothing of significance appears to have passed between the parties until Hansen Yuncken caused a letter to be sent to Structural Systems on 15 November 2010.  That letter made claims against Structural Systems under the contract which, if valid, would entitle it to damages.  Three days later Hansen Yuncken called on the bank guarantees and was paid $633,000 by the National Australia Bank who are Structural Systems’ bankers.

7                     By application dated 19 November 2010 Structural Systems commenced a proceeding in this Court.  Its application claims interlocutory and final relief and compensation in respect of Hansen Yuncken’s call on the bank guarantees.  It was contended that this call contravened the provisions of s 51AA of the Trade Practices Act 1974 (Cth) (“the TP Act”) because the call was unconscionable. 

8                     On 19 November 2010 the claim for interlocutory relief came on urgently before me.  Structural Systems gave the usual undertaking as to damages and Hansen Yuncken undertook to maintain funds not less than $633,000 in a nominated Westpac Banking Corporation account until 4:30 pm today.

9                     When the matter returned to Court this morning counsel for Structural Systems sought an interlocutory injunction requiring Hansen Yuncken to repay $316,500.  Counsel for Hansen Yuncken resisted the application.

10                  Structural Systems submitted that there was a serious question to be tried as to whether half the amount of the security, originally provided by Structural Systems, should have been repaid to it prior to the call being made.  They relied on Clause 5.7 of the contract which provides:

“Upon issue of the Certificate of Practical Completion by the Superintendent to the Main Contractor under the Main Contract between the Main Contractor and the Principal, and the Subcontractor also complying strictly with the requirements of Clauses 42.5 and 42.5A, the Main Contractor’s entitlement to security shall be reduced to the percentage thereof stated in Annexure Part A.  …

The Main Contractor shall release security in excess of the entitlement within 21 days of the entitlement being so reduced in accordance with this clause 5.7”

11                  The percentage stated in Annexure A was half the original figure.  Unbeknown to Structural Systems at the time at which it commenced the proceeding, the Certificate of Practical Completion had been issued on 18 February 2010.  It submitted that, had the temporal requirements of Clause 5.7 been complied with, the security would have been reduced by half, and $316,500 would have been returned to it and would not, as a result, have been available when the call was made on the security last month. 

12                  In framing its claim in this manner, Structural Systems no doubt had regard to the provisions of Clauses 5.1 and 5.5 of the contract which entitled Hansen Yuncken to have recourse to the securities pending the resolution of any disputed claims and, in particular, to that part of Clause 5.5 which provides:

“A party is not entitled to commence any proceeding, seeking relief by way of injunction or any other relief, which has as its objective the obtaining of an order preventing the other party from having recourse to retention moneys and/or security even though the party contemplating the commencement of proceedings may assert that there is no right to have recourse to retention moneys and/or security.”

13                  Hansen Yuncken submitted that there was no serious question to be tried because Structural Systems had not complied with the requirements of Clause 42.5A of the contract in February 2010 or at all and that, as a result, it had not been under an obligation to reduce the amount of the security under Clause 5.7.

14                  Clauses 42.5 and 42.5A provide:

“42.5    Certificate of Substantial Completion

Subject to clause 42.5A, the Subcontractor shall give the Main Contractor at least 14 days’ notice of the date upon which the Subcontractor anticipates that Substantial Completion will be reached.

When the Subcontractor is of the opinion that Substantial Completion has been reached, the Subcontractor shall request in writing the Main Contractor’s Representative to issue a Certificate of Substantial Completion.  Notwithstanding anything contained elsewhere in the Subcontract the Main Contractor is not required to certify the Date of Substantial Completion until the Subcontractor has complied with any directions given by the Main Contractor under the Subcontract.

Within 14 days of receiving the Subcontractor’s request with the documents referred to above, the Main Contractor shall advise the Subcontractor of the date on which an inspection of the Works shall be carried out by the Main Contractor.

Each of the Main Contractor and the Subcontractor and its appointed representatives may attend such inspection.

Within 14 days of the carrying out of such inspection, the Main Contractor shall either:

(i)         if the Main Contractor is of the opinion that the Works has reached Substantial Completion issue a Certificate of Substantial Completion attaching details of any minor defects and omissions to be rectified by the Subcontractor as at the date of the inspection; or

(ii)        notify the Subcontractor that the Main Contractor is of the opinion that Substantial Completion has not been reached and that the defects and omissions (as specified in the notice) must be rectified to the reasonable satisfaction of the Main Contractor before a Certificate of Substantial Completion will be issued.

If the Main Contractor issues a notice to the Subcontractor pursuant to paragraph (ii) above, the Subcontractor must rectify such defects and omissions as specified as soon as possible.  This Clause 42.5 continues to apply until the Main Contractor has issued a Certificate of Substantial Completion pursuant to paragraph (i) above.

On a further inspection following issue by the Main Contractor of a notice pursuant to paragraph (ii) above, the Main Contractor may inspect the whole of the Works and is not limited in any way to inspecting the defects and omissions identified in the notice.  On such further inspection the Main Contractor may specify defects or omissions in the Works not identified in the previous notice.

When the Main Contractor’s Representative is of the opinion that Substantial Completion has been reached, the Main Contractor’s Representative may issue a Certificate of Substantial Completion, whether or not the Subcontractor has made a request for its issue.

42.5A   Matters to be attended to prior to Substantial Completion

The Subcontractor must:

(a)        at least five working days prior to the Date for Substantial Completion, provide to the Main Contractor the following:

(i)         all completed final shop drawings and as built drawings and operating and maintenance manuals in the form and quantity required by the Main Contractor;

(ii)                all original warranties, including the warranties required to be provided under the Subcontract;

(iii)               all notices, licenses, consents, permits, approvals and certificates required to be obtained from relevant authorities not provided as per the definition of Substantial Completion;    

(iv)              any other documents required by the Specification to be provided prior to Substantial Completion where no specific time is nominated for the provision of the document; and

(iv) [sic] all keys, property labelled, for the Works; and

(v)                evidence that the Maintenance Works have been carried out in accordance with the Subcontract and the Specification

(vi)              evidence of compliance with, all relevant aspects of the quality assurance system, including having undertaken all final inspections and testing of the Works required by that system.”

15                  Structural Systems substantially completed its work on the project in July 2009.  Structural Systems did not request Hansen Yuncken to issue a Certificate of Substantial Completion and none was issued.  Nonetheless, it was conceded by Hansen Yuncken that substantial completion had occurred at or about the time on which the final concrete pour occurred on 22 July 2009.

16                  Structural Systems accepts that it did not provide Hansen Yuncken with each of the items set out in Clause 42.5A(a) “at least five working days prior to the Date for Substantial Completion”.  It submitted, however, that many of the items did not apply to it having regard to the nature of the work which it performed and that, in any event, there was evidence to support its asserted compliance with paragraph (vi), albeit not in a timely way.  It contended that paragraph (vi) was to be understood as a “catch all” requirement and that, to the extent that it was required to comply with the earlier paragraphs, its compliance with paragraph (vi) indicated that it had done so, albeit out of time. 

17                  It is inappropriate, on an interlocutory application, for me to express any concluded view on the inter-relationship between Clauses 5.7 and 42.5 and 42.5A of the contract.  It is sufficient that I state that I consider that there is a serious question to be tried as to whether Hansen Yuncken was required, by Clause 5.7, to reduce by half the amount of the security given by Structural Systems once the Certificate of Practical Completion had been issued in February 2010.  There is a subsidiary question as to whether that obligation was negatived by Structural Systems’ failure to comply (at least in a temporal way) with its obligations under Clause 42.5A.  The answer to that question may turn on whether substantial and practical compliance with the requirements of that sub-clause can be regarded as sufficient in the “real world” of the building industry.

18                  Structural Systems submitted that the balance of convenience favoured the granting of injunctive relief.  It emphasised the detrimental effect of a calling up of bank guarantees on its relationship with its bankers and its reputation in the industry.  The managing director of Structural Systems deposed that:

“22.      As a result of the Securities being called the Applicant’s bank balance was reduced unexpectedly by $633,000.00.  While this did not result in the Applicant exceeding its bank facility limits it is a substantial sum and has resulted in the Applicant’s account going into overdraft whereas it otherwise would not have.  The Applicant has incurred expenses including legal fees, overdraft interest and fees payable upon the calling in of the Securities which would not have been incurred had the Respondent not called the Securities.

23.        To the best of my knowledge and certainly during my time working for the Applicant (since July 2002) the Applicant has never had a bank guarantee called or equivalent security call on.

24.        The NAB is currently in the process of undertaking a review of the Applicant’s facilities as part of the annual facility roll.  The Applicant’s bank guarantee facility makes up the largest component in terms of credit of the Applicant’s banking facility with the NAB.  For example of a total credit facility of $38,985,772.00 bank guarantees comprise $20,035,772.  The fees payable in respect of the face value of each bank guarantee and the amount of the facility which the NAB is prepared to advance to the Applicant is directly referable to how the bank assesses the contingent risk that the bank guarantees will be called upon.  Up until the date the Respondent called these guarantees the Applicant had always been able to demonstrate that the risk attached to this contingent liability was low as no guarantees had previously been called on.  If the NAB were to assess that the contingent liability of the Applicant in relation to bank guarantees was higher than in previous years as a result of the Respondent calling the Securities then those fees may increase and the limit of the facility may decrease for the Applicant specifically.  In my opinion the NAB will be likely to assess the Applicant’s contingent liability risk as being higher given the calling of the Securities by the Respondent.  If the Applicant obtains a court order compelling the Respondent to return all or part of the proceeds of the Securities this will in my opinion have a positive and restorative effect on the confidence the NAB has in the Applicant.

25.        The calling of these guarantees came as a complete surprise to the Applicant.  The Applicant has a very open relationship with the NAB and if it has any issues that have an impact on its facility it is generally in the position of being able to advise the NAB of the issue and give an explanation and a strategy of how it will be handled before the issue arises.  In this case, the Respondent called upon the Securities without first adopting the disputes resolution process under the Subcontract or providing any express indication that it intended to do so.  As stated in paragraph 6 of my First Affidavit I attempted to contact Mr Damien Penfold many times to discuss the 15 November Letter after receiving it but was not able to do so.  As a result the Applicant was unable to give prior notification to the NAB of the call and this may affect the perception which the NAB has over the controls which the Applicant has over its contingent liability.

26.        I understand that the pricing of the Applicant’s facility compared to its competitors is very competitive.  This is due to the long standing relationship between the Applicant and the NAB based on trust between representatives of the parties and respect for business competence.  It is my opinion that the calling of the Securities will have eroded the confident the NAB has in our systems and project management.  If the Applicant obtains a court order compelling the Respondent to return all or part of the proceeds of the Securities this will in my opinion have a positive and restorative effect on the confidence the NAB has in the Applicant.

27.        I have been involved in the building and construction industry in various roles since 1985.  In my experience, bank guarantees under a building contract are very rarely called upon, and are generally only utilised as a “last resort” when all other options (including contractually stipulated dispute resolution processes under the relevant building contract) have failed.

28.        In my experience in the building and construction industry, a builder’s reputation is paramount.  The calling up of a bank guarantee is a serious matter for the Applicant, with the potential to irreparably damage the Applicant’s reputation as a competent builder, which might be taken advantage of in future projects by the Applicant’s competitors.  Again, if the Applicant obtains a court order compelling the Respondent to return all or part of the proceeds of the Securities this will in my opinion have a positive and restorative effect on the reputation of the Applicant in the building and construction industry.”

19                  This evidence was not disputed.  Counsel for Hansen Yuncken nonetheless sought to undermine the strength of it by pointing to the fact that, even if Structural Systems were to obtain the return of half the money provided by way of security, the industry would be aware that a call had successfully been made on the balance of the sum.  It is, however, to be noted that Mr Perry’s evidence suggested that some at least of the damage would be ameliorated by an order for partial return of the security deposit.

20                  Structural Systems also relied on what it submitted was the high-handed conduct of Hansen Yuncken in the lead up to the call being made.  The call had been made after a lengthy silence and without notice to Structural Systems.  I do not accord this consideration a great deal of weight.  The contract specifically provided for a call to be made without notice and Structural Systems was at least equally responsible for the adjourned December 2009 meeting not being reconvened.

21                  The outcome of the present interlocutory application will have little, if any, bearing on the resolution of the commercial disputes between the parties.  They have agreed on the means by which those disputes are to be resolved.  Whether any money is to change hands and, if so, in what direction and in what amount are matters that must await the outcome of the dispute settling procedures.  Both companies are reputable participants in the building and construction industry and both are in a financial position to meet its obligations to the other should that be necessary.

22                  In my view, the proper course is for the undertaking, given by Hansen Yuncken, to be continued pending the hearing and determination of the proceeding but only to the extent of $316,500.  If for any reason Hansen Yuncken is not prepared to renew its undertaking, then I am disposed to grant an injunction requiring it to pay $316,500 to Structural Systems.  Either course will, in my view, ensure that Structural Systems’ relationships with its bankers and its reputation in the industry are protected pending the resolution of the underlying disputes and a trial:  cf Theiss Pty Ltd v Pacific National (Victoria) Pty Ltd (unreported, Supreme Court of Victoria, Judd J, 22 July 2009) at [17]-[25].  Neither will cause any significant prejudice to Hansen Yuncken.

Associate:

Dated:         6 December 2010