CONSTRUCTION ALERT: Notice requirements for security in building contracts

Dec 2 2015

Publications

A party that wishes to call on performance security given under a building contract is required to serve written notice on the other party within a prescribed timeframe.  This notice obligation is found in s 67J of the Queensland Building and Construction Commission Act 1991 (Qld) (QBCC Act) which provides that, before having recourse to security given under a building contract:

  • the contracting party (e.g. principal) must give notice in writing to the contracted party (e.g. builder) advising of the proposed use of the security and of the amount owed; and
  • the notice must be given within 28 days of when the party using the security became aware (or should reasonably have become aware) of its right to obtain the “amount owed”.

Importantly, these requirements do not apply where work has been taken out of the hands of the contracted party (i.e. contractor), the contract has been terminated, or the security is being used to make a payment into court to satisfy a Form 1 Notice under the Subcontractors’ Charges Act 1974 (Qld).

The notice requirement in s 67J of the QBCC Act has been the subject of three recent Supreme Court decisions, providing valuable guidance on how that section should be interpreted, and the consequences of noncompliance.  It is important that parties take note of the lessons arising from these decisions as failure to do so could result in valuable security rights being lost.


Beyfield Pty Ltd v Northbuild Construction Sunshine Coast Pty Ltd [2014] QSC 12


Northbuild (the head contractor) and Beyfield (the subcontractor) were parties to a contract for the carrying out of mechanical works as part of the construction of a Chronic Disease Centre on Thursday Island.  Beyfield provided two bank guarantees to Northbuild as required by the contract.  Northbuild served notice on Beyfield that it intended to use the guarantees to claim unliquidated damages for various alleged breaches of the subcontract by Beyfield.  The notice was not given under s 67J of the QBCC Act but rather under the contract, which allowed Northbuild to have recourse to the bank guarantees for “any claim to payment, liquidated or unliquidated” upon written notice to Beyfield.

Northbuild argued that s 67J of the QBCC Act only applied to “amounts owed” which did not include the claimed unliquidated damages.  In response, Beyfield argued that the relevant clause was inconsistent with s 67J of the QBCC Act and therefore void (as s 67E of the QBCC Act prevents “contracting out”).  Beyfield also said that Northbuild could not use the securities to recover damages as they were not “amounts owed”.  Martin J agreed with Beyfield, holding that the relevant clause was inconsistent with s 67J of the QBCC Act and void, as it purported to allow access to security for claims that were not “amounts owed”.  This is because “amounts owed” is defined in the QBCC Act as being a “debt due”.

The effect of this decision was seemingly that parties to building contracts would only be able to use security to recover “debts due” and not unliquidated sums.  Somewhat presciently, in light of the potential practical difficulties with that approach, Martin J held that, even if he were wrong and security given under building contracts could be used to satisfy unliquidated claims, Northbuild’s claims were not bona fide and Beyfield would have been entitled to the declarations sought in any event.

Monadelphous Engineering Pty Ltd & Anor v Wiggins Island Coal Export Terminal Pty Ltd [2014] QCA 330

WICET (the proponent) and MMM (the contractor) were parties to two contracts to carry out certain works forming part of the new multibillion dollar Wiggins Island Coal Export Terminal at Gladstone.  As part of the contracts, MMM provided four bank guarantees totalling about $38 million. Under the contracts, WICET was entitled to use the securities in certain circumstances including when it had a bona fide claim against MMM (whether for a liquidated or unliquidated amount). When WICET ultimately attempted to use the securities to recover delay damages, MMM sought an interlocutory injunction to stop it. 

The usual test applied by the Court to determine whether an interlocutory injunction is appropriate is whether there is a “serious question to be tried” and whether the “balance of convenience” favours the granting of the injunction. It was accepted that WICET had not served notices in accordance with s 67J of the QBCC Act, however the “serious question to be tried” was whether it was required to.

Section 67J of the QBCC Act only applies to building contracts. However, the definition for “building contract” is relatively expansive. At first instance, the Supreme Court refused the application, holding that the contracts were not building contracts. The court also held that the “balance of convenience” did not favour granting the injunction as MMM could be compensated by damages. 

MMM appealed both decisions to the Court of Appeal arguing that the contracts were building contracts and it would suffer reputational damage if WICET called upon the guarantees, meaning damages would not be adequate compensation.  Unanimously, the Court of Appeal held that:

  • there was no building work required under one contract as it was all excluded by regulation but that there was a “serious question to be tried” as to whether the other contract required building work;

  • the injunction should be refused as MMM’s argument that it would suffer reputational damage relied upon it having never had a guarantee called upon, which fell away when WICET could call on the guarantee given under the first contract.

Saipem Australia Pty Ltd v GLNG Operations Pty Ltd (No 2) [2015] QSC 173

GLNG (the principal) and Saipem (the contractor) were parties to a design and construction contract for the construction of a gas pipeline and related infrastructure. As part of the contract, Saipem provided two bank guarantees intended to secure its obligations under the contract, which, relevantly, GLNG was entitled to use to recover any “debt due”. 

When GLNG sought to use the guarantees to recover liquidated damages for failing to achieve mechanical completion and practical completion, Saipem sought an interlocutory injunction. The bases on which Saipem claimed that GLNG could not use the bank guarantees were that:

  • the contract restricted GLNG’s right to use the security to circumstances where there was a “debt due” and the amounts claimed were not “debts due” but were only claimed as such;
  • section 67J of the QBCC Act also restricted GLNG’s right to use the security to “debts due”; and
  • GLNG had not complied with s 67 of the QBCC Act by giving the required notice within time.

The Court held that there was a “serious question to be tried” in relation to all of the above issues – GLNG conceded the first two and the Court found that the notice had been given out of time following mechanical completion and may have been given out of time for practical completion. However, Philip McMurdo J rejected Saipem’s second argument and, in so doing, qualified Martin J’s decision in Beyfield by holding that s 67J of the QBCC Act did not affect a party’s contractual entitlement to security, but merely imposed a notice precondition. This is an important point insofar as it seemingly limits the effect of the earlier decision in Beyfield such that parties should be entitled to use security as per the relevant contract.

Turning to the “balance of convenience”, McMurdo J differentiated the circumstances from Monadelphous and awarded an interlocutory injunction restraining GLNG from calling upon the guarantees to recover the liquidated damages relating to mechanical completion and a short injunction for 14 days because:

  • there was a prospect that Saipem would suffer loss as a result of GLNG calling on the guarantees (in the form of, largely, reputational damage);
  • the short injunction would give Saipem an opportunity to pay the amounts claimed to be owed and therefore avoid the possible loss; and
  • GLNG would not be significantly prejudiced as it would retain the ability to have recourse to the guarantees if it was ultimately found that Saipem was liable for the liquidated damages.

Implications

Our tips for ensuring that recourse to security is as painless as possible are as follows:

    • Diligently administer contracts to ensure any deadlines for giving security are not missed. Treat the 28 day period as a “time bar” and ensure your project managers and superintendent are aware of it.

    • If the 28 day period is missed, you should still consider using the security. This
      is because the Court generally give a broad interpretation to when the
      28 day period starts and it is usually difficult for the other party to
      obtain an injunction.
    • Include a mechanism in your building contracts to convert “unliquidated sums” (such as damages) to “liquidated sums”. A common method is to allow the superintendent to certify amounts as due and payable.
    • Limit the time between giving notice and calling on the security.  Section 67J of the QBCC Act does not prevent a party from immediately calling on security once notice has been given. Limiting the time between serving notice and calling on security will prevent the other party taking steps to disrupt the process.

    Written by:

    Andrew Kelly | Partner | +61 7 3338 7550 | akelly@tglaw.com.au

    Andrew Mackintosh | Senior Associate | +61 7 3338 7551 | amackintosh@tglaw.com.au

    Chris Collins | Senior Associate | +61 7 3338 7553 | ccollins@tglaw.com.au

    Craig Sherritt | Paralegal | +61 7 3338 7563 | csherritt@tglaw.com.au