New South Wales Supreme Court CITATION : FLETCHER CONSTRUCTION v SAVDAY [1999] NSWSC 2 CURRENT JURISDICTION : EQUITY DIVISION FILE NUMBER(S) : 5182/98 HEARING DATE(S) : 7 January 1999 JUDGMENT DATE : 7 January 1999 PARTIES : FLETCHER CONSTRUCTION AUSTRALIA LTD v SAVDAY PTY LIMITED JUDGMENT OF : Bryson J at 1 COUNSEL : PLAINTIFF: MR M RUDGE SC DEFENDANT: MR M B EVANS SOLICITORS : PLAINTIFF: PHILLIPS FOX DEFENDANT: BOWEN & GERATHY CATCHWORDS : Building Construction; JCCB 1985; Retention; security deposit by Bank bond; interlocutory decision requiring amount of bond withdrawn by proprietor from Bank to be re-deposited pending determination of entitlements; no important question of principle DECISION : SEE PARAGRAPH 27 IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION BRYSON J THURSDAY 7 JANUARY 1999 5182/98 FLETCHER CONSTRUCTIONS AUSTRALIA LIMITED v SAVDAY PTY LIMITED JUDGMENT 1 HIS HONOUR : This litigation arises out of a performance bond obtained by the plaintiff (the builder) and given by Citibank Limited to the defendant (the proprietor). The bond is in a form the general features of which are familiar in building construction business. The plaintiff is not a party to it. The bank made itself liable to pay to the defendant sums as demanded up to a maximum of $196,000. There are no reservations about the bank's liability and, in particular, the plaintiff was not in a position to countermand payment by the bank. The plaintiff would have no equity to restrain payment by the bank at whatever time the plaintiff might apply for an injunction against the bank, and the bank is not a party to these proceedings. 2 The building contract of 24 March 1995 relates to the construction of the Sea Breeze apartments at 765 Princes Highway, Blakehurst. The contract is not on a printed standard form but refers to "Modified Building Works Contract - JCCB1985 without quantities." 3 Significant provisions of the contract include clause 6.11 relating to making good defects. Under this clause the project manager may issue an instruction specifying defects and the builder has to make them good promptly, and if this is not done within a reasonable time the proprietor may have the defects made good by others. 4 The contract contains provisions establishing a defects liability period which plainly has expired; the period is fixed by reference to clauses 6.11.06 and 9.11 and Fifth Schedule item F at fifty-two weeks from practical completion. Clause 9.9 contains provisions which establish when practical completion occurs. The evidence has not established the actual date exactly but there have been assertions on both sides which mean that it occurred at some time in December 1995 and the defects liability period of fifty-two weeks expired at some time in December 1996. The defendant has stated that 23 December 1998 was the third anniversary of practical completion. Although this was in difference between the parties to the point that cross-examination was directed to the plaintiff's difficulties in establishing exactly when it occurred, the overall positions of the parties to which I have earlier referred establish that practical completion occurred in December 1995. 5 Clause 9.11 operating with the findings I have already made and the provisions of item F establish that any defects liability period which may be relevant expired in December 1996. 6 By clause 6.11.06 the project manager may by notice to the builder fix a second defects liability period and there was a limited time during which the second defects liability period so fixed would operate. The plaintiff's case is to the effect no second defects liability period was ever fixed, so that there was never any extension of the defects liability period in any way. The defendant's position is to the effect that there was an extension by virtue of references to the second defects liability period in the defendant's letter to the plaintiff of 21 June 1998. The significant references are in the second paragraph of that letter although the whole letter should be taken together. In my understanding of the letter it does no more than refer to the possibility of a second defects liability period being fixed. No effectual step was taken by that letter. I conclude on the evidence generally that no step was taken in any way to extend the defects liability period. 7 The security deposit was referred to in the contract in ways which did not establish altogether satisfactorily how it was to be dealt with. The rights conferred on the defendant by the terms of the bank's performance bond are for practical purposes absolute but the terms of the performance bond do not establish as between the parties to the building contract in what circumstances the proprietor may resort to the performance bond. That must be established by the terms of the building contract and not otherwise. 8 Clause 10.20 "Security to be provided by the builder" provides: "The builder shall provide security to the amount calculated in accordance with item Q1 of the appendix as the amount of security for the due performance of his obligations under this agreement ...". 9 Item Q1 provides for two amounts: under Q1A, two and a half per cent of the contract sum to be released on practical completion and under item Q1B another two and a half per cent of the contract sum as security to be released on expiration of defects liability period or periods. This is the amount which gives rise to this litigation. 10 Clause 10.21 relates to the form of security. Clause 10.21A is entitled "Release of parties' securities." For the amount in item Q1A provision was made for release on practical completion or by reference to practical completion and the availability of a s 172 certificate. In some way this amount was released. The amount in item Q1B is dealt with thus: "The security shall be released as follows; (a) ... (b) As to the amounts specified in item Q1B of the appendix on the expiration of the defects liability period or any second defects liability period or periods affixed pursuant to cl 6.11.06." 11 A clause 10.25 appears as a matter of form in the document with the heading "Conversion and availability of security" but the heading is followed by this: "(Not applicable)". On a pitilessly literal reading this I suppose could be understood to mean that conversion and availability to the proprietor of the security are not applicable to this contract. This cannot be the correct reading when the whole context is considered, as it is quite clear there was to be security and if there was to be a security it was to be there for some purpose. The probable effect of clause 10.25 is that the parties decided that some standard form of a clause dealing with that subject was not to be used. 12 Clause 11.10 "Release of security" provides "The security will be released in accordance with clause 10.21A." 13 The plaintiff's contention is to the effect that clause 10.21A(b) operating together with clause 11.10 has the effect that the plaintiff had a contractual right to the release of the security at the expiration of the defects liability period in December 1996. The plaintiff contends that this right has continued unimpaired because no second defects liability period has ever been fixed. 14 There is some difficulty about understanding these provisions together as they seem to contemplate that the opportunity might be held open to the defendant over some period of time to fix several defects liability periods and that the security would remain available during that period. However on the facts as determined by me earlier no further defects liability period has been fixed. 15 The plaintiff it appears to me has a very strong prima facie case to the effect that it has a contractual entitlement either to restoration of the item Q1B security or to its being left untouched unless and until there has been some event which fixes a second defects liability period. 16 The performance bond should in my understanding be conceived of as a piece of property in the nature of a deposit in the bank which the plaintiff has subjected to a mortgage or pledge in favour of the defendant. The plaintiff is entitled to protections of kinds available to mortgagors in respect of the security and, in particular, is entitled to be protected against action taken by the defendant as mortgagee against the plaintiff's property in circumstances where such action is not authorised by the agreement which created the pledge. 17 The plaintiff's case that the calling up by the defendant of the security deposit on 23 December 1998 followed by actually collecting the proceeds on 24 December was in breach of the plaintiff's contractual and property rights is a very strong prima facie case. 18 The plaintiff claims today an interlocutory order in terms of claim 4 in the summons, an order pending resolution of the proceedings that the proceeds of the undertaking be placed into a joint account with Citibank Limited in the names of the solicitors for the parties. Evidence produced by the defendant shows that the defendant cannot literally comply with an order in those terms. The defendant's evidence shows that Mr John Gerathy a director of the defendant attended at the office of the bank on the afternoon of 24 December and collected a bank cheque drawn in favour of the defendant for $196,000, and that then the cheque was not deposited in the defendant's account but was endorsed to Davlon Management Pty Limited and handed to Peter Londish, an officer of that company. The defendant's allegation is that payment was made to Davlon Management Pty Limited in payment of fees due to that company. The defendant's evidence would also show that forthwith and out of the proceeds Davlon disbursed money, not necessarily the whole of the proceeds, and in particular made two payments of $70,000 and $80,000 which on the probabilities (and Mr John Gerathy is not in Australia and not able to explain the circumstances) appear to have been paid to him. A further payment of $20,000 was made but the payee is not identified. 19 At practical completion there were many defects and lengthy schedules of defects, and some indications of the difficulties in dealing with them appear in the schedules in Exhibit 1. From their number and the time taken to deal with them it is not surprising that the defendant should have the view that it is entitled to make some claim in respect of them. However claims specifically that the plaintiff should perform work to rectify defects had come down by 23 December to a very small matter which would not possibly have justified the appropriation of $196,000 or any sum of that kind. Four defects are referred to in the correspondence of 22 and 23 December 1998. It is conceivable that it might cost some thousands of dollars to do the work but quite impossible that it would cost anything like $196,000. The plaintiff's National Contracts Manager Mr Davey took the position and maintained under cross-examination on information and belief that the work referred to in that correspondence had been completed on 24 December, but in my judgment on the limited evidence available it is not probable that all of the work was performed on or by 24 December. 20 On the views I have already expressed, the defendant no longer had any entitlement to security on 23 and 24 December. However if there were such an entitlement it is not at all clear that resort to the security would be limited to the cost of work to rectify defects. It seems possible and reasonably open to argument that the security is available for protection of the defendant in respect of claims for general damages. I leave this question to one side and express no opinion on it. 21 There are aspects of the way in which the defendant has proceeded which lend emphasis to the need for interlocutory protection. One is the absence of any notice given by the defendant of its intention to call up the security. The defendant sent a fax message to the plaintiff on 23 December indicating that that would be done and proceeded forthwith to do it by sending a director to attend at the bank the same day and require payment. Then this action was completed the following day by collecting the cheque. The letter of 23 December did not in any way specify what were the claims against which $196,000 was to be collected, except in the most general terms by saying "We confirm our previous advices that Savday has incurred, as a result of Fletcher's default, direct costs of approximately $200,000.00. In respect of these costs we propose to call in the Bank Guarantee ....". 22 In relation to parties who had had a contractual relationship for some years it is disturbing that there was that there was no effectual notice or clear statement of what were seen as the grounds supporting the action. The chain of events must have been very surprising to the plaintiff in view of the communications then proceeding, the latest being the fax message of 22 December 1998 which while complaining in appropriately strong terms about the state of the work to rectify the remaining defects, gave no indication that there would be action to call up a large sum the following day. 23 Then there is the fact that having collected the cheque the defendant did not deposit it in its own account or handle it through its own organisation, but immediately endorsed it to another company which equally immediately disbursed the proceeds in part to one of the principals of the defendant, and he left the country shortly thereafter. 24 In my view these circumstances support the making of an interlocutory order of the kind which the plaintiff seeks. 25 The substance of the matter is that the plaintiff has shown a strong prima facie case to the effect that the defendant has alienated its property in circumstances where the defendant had no right to do so. The plaintiff's claim for an interlocutory injunction requires not exactly restoration of the property but placing of that property or an equivalent sum in a safe place pending the decision of the litigation, and this is a claim which I ought to accede to. 26 The defendant having disposed the proceeds and created difficulties for itself, given the apparent circumstances of its lack of right to collect the money at all, does not appear to me to have much claim for allowance of time or consideration of its difficulties or inconvenience. The defendant has shown itself capable of very rapid action in handling money and I should attribute to it much the same facility with respect to compliance with my order. 27 I make the following orders: Upon the plaintiff by counsel giving to the Court the usual undertaking as to damages, I order that forthwith the defendant deposit the sum of $196,000 in a joint account with Citibank Limited in the names of Pamela Margaret Jack and Ann Marie Bowen. The costs of the application for an interlocutory order are plaintiff's costs in the proceedings. I hereby certify that paragraphs 1-27 are the reasons for judgment of the Honourable Justice John Bryson. Dated 29 January 1999. (H D LEWIS) Associate. Last Modified: DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.