Reported Decision : [2001] 17(1) BCL 66 New South Wales Supreme Court CITATION : George Feros Memorial v Hammat Constructions [2000] NSWSC 808 CURRENT JURISDICTION: Common Law FILE NUMBER(S) : SC 11131 of 2000 HEARING DATE(S) : 4 August 2000 JUDGMENT DATE : 17 August 2000 PARTIES : George Feros Memorial Hostel Committee Incorporated (Plaintiff) Hammat Constructions Pty Limited (Defendant) JUDGMENT OF : Windeyer J at 1 LOWER COURT Local Court JURISDICTION : LOWER COURT No. 62 of 1999 at Lismore FILE NUMBER(S) : LOWER COURT Magistrate Linden JUDICIAL OFFICER : COUNSEL : Mr C Harris (Plaintiff) Mr C Bevan (Defendant) SOLICITORS : Stone & Partners (Plaintiff) Somerville Laundry Lomax (Defendant) CATCHWORDS : APPEAL from Magistrate - decision under Contractors Debts Act 1997 - whether the rights of a subcontractor to recover moneys under the Act extend to recovery from a security bond from bank - whether the bank guarantee was "money that is payable or became payable to the defaulting contractor" by the proprietor - whether there was a statutory obligation on the proprietor to call upon the security - appeal upheld - STATUTE - Contractors Debts Act - interpretation - whether term "money" included a security bond from bank - whether Act should be construed purposively - no ambiguity in the term "money" Contractors' Debts Act 1897, s9 LEGISLATION CITED : Contractors Debts Act 1997 ss5, 5(1), 6, 7, 8, 9, 11, 11(4), Sch 1, Pt2 Cl3 and 4 Suitors Fund Act 1951 CASES CITED : Australasian Conference Association Limited v Mainline Constructions Pty Limited (in liq) (1978) 141 CLR 335 DECISION : See paragraph 18 1 IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION WINDEYER J THURSDAY 17 AUGUST 2000 11131/00 GEORGE FEROS MEMORIAL HOSTEL COMMITTEE INCORPORATED v HAMMAT CONSTRUCTIONS PTY LTD JUDGMENT Outline 1 This is an appeal from a decision of Magistrate Linden in the Local Court at Lismore dated 7 April 2000 under the Contractors Debts Act 1997 (the Act). The question for decision is whether the rights of a subcontractor to recover moneys due by a defaulting contractor from the proprietor out of moneys due by the proprietor to the contractor extends to recovery from a security bond from bank to proprietor given in lieu of a retention fund. Contractors Debts Act 1997 2 The relevant provisions of the Act are as follows: 5 Unpaid persons can obtain payment from principal (1) A person (the unpaid person) who is owed money for work carried out or for materials supplied to some other person (the defaulting contractor) can obtain payment of that money in accordance with this Act out of money that is payable or becomes payable to the defaulting contractor by some other person (the principal) for work or materials that the principal engaged the defaulting contractor to carry out or supply under a contract. (2) However, the unpaid person can obtain payment from the principal under this act only if the work carried out or materials supplied by the unpaid person are, or are part of or incidental to, the work or materials that the principal engaged the defaulting contractor to carry out or supply. 6 Procedure for obtaining payment (1) The following procedure must be followed to obtain payment of the money owed: (a) firstly, a debt certificate must have been issued for the money owed (as provided for by section 7), (b) secondly, the unpaid person must serve a notice of claim on the principal (2) A notice of claim is a notice in an approved form together with a copy of the debt certificate. 7 Certification of debt by court (1) When judgment is given in any proceedings relating to the recovery of money owed to a person for work carried out or materials supplied, the court may, by order made on the application of the person in whose favour the judgment is given, issue a certificate (a debt certificate) in respect of the debt under this section. (2) If the debt concerned consists of daily, weekly or monthly wages, and the debt exceeds 120 days' wages, the amount certified in the debt certificate is not to exceed 120 days' wages. (3) A debt certificate is not to be issued if the court is satisfied that the work was done on something moveable and it would be practicable for the applicant to exercise a lien by retaining the thing in the applicant's possession. (4) A debt certificate is to be in an approved form. (5) In this section, judgment includes a default judgment 8 Notice of claim operates as assignment of debt (1) Service of a notice of claim on the principal operates to assign to the unpaid person the obligation of the principal to pay the money owed under the contract to the defaulting contractor. (2) The assignment is limited to the amount of the unpaid person's certified debt. (3) The assignment is subject to any prior assignment under this Act that is binding on the principal and the defaulting contractor. 9 Payment of defaulting contractor's debt by principal (1) After a notice of claim is served on a principal in accordance with this Part, the principal must pay the money owed to the defaulting contractor to the unpaid person. (2) The principal must make the payments to the unpaid person as they become payable under the contract with the defaulting contractor until whichever of the following first occurs: (a) the principal receives a discharge notice, or discharge notices, indicating that the certified debt has been fully discharged, or (b) the payments are no longer payable under the contract. … 11. Right of recovery if principal fails to pay (1) An assignment effected by operation of this Act is valid at law. (2) Accordingly, if the principal fails to make any payment required to be made by this Act, the unpaid person may sue for and recover the debt assigned to the unpaid person, in the unpaid person's own name. (3) Proceedings for recovery of the debt may be taken in any manner in which the defaulting contractor might have taken them had there been no assignment. (4) An unpaid person's right of recovery under this section is subject to any defence that the principal would have had against recovery of the debt by the defaulting contractor had there been no assignment, other than a defence based on something done by the principal after the notice of claim was served on the principal. Facts 3 The facts of this matter were agreed by the parties by joint statement before the Magistrate, and were recorded in the learned Magistrate's judgment. The relevant facts are as follows. 4 On 6 February 1997 Hanna & Edmed Pty Limited ("the builder") and George Feros Memorial Hostel Committee Incorporated ("George Feros") executed a contract being a standard building works contract JCC-D 1994 to carry out building works at premises belonging to George Feros. 5 The relevant terms of the contract were as follows: 9.11 DEFECTS LIABILITY PERIOD The Defects Liability Period shall commence on the date on which the Works reached or were deemed to have reached Practical Completion according to any of paragraphs 9.09.02, 9.09.04 and 9.10.04 and shall subject to paragraph 6.11.06 continue for the period stated in Item H of the Appendix. … 10.20 SECURITY TO BE PROVIDED BY BUILDER The Builder shall provide security to the amount or percentage of the Contract Sum stated in Item S of the Appendix as the amount of security for the due performance of his obligations under this Agreement. 10.21 FORM OF SECURITY Such security shall be in the form of either one or other or a combination of: 10.21.01 An unconditional undertaking or certificate in a form approved by the Proprietor and given by a Bank licensed under the provisions of the Banking Act, 1959 (as amended) or tother financial institution approved of by the Proprietor (hereinafter called a "Bank Guarantee"); and 10.21.02 an amount to be retained progressively by the Proprietor in accordance with the provisions of paragraph 10.23.01 and paid by him to the credit of an account in the joint names of the Proprietor and the Builder in accordance with paragraph 10.23.02 (hereinafter called "a Retention Fund held by the Proprietor and the Builder on joint account") 10.22 BANK GUARANTEE Where the security or any part thereof provided by the Builder is in the form of a Bank guarantee the following provisions shall apply: 10.22.01 The Builder may provide one or more Bank Guarantees aggregating the amount of security required in terms of this Agreement. 10.22.02 Such Bank Guarantee or Bank Guarantees shall be maintained effective until the issue by the architect of the notice of Practical Completion pursuant to Clause 9.09 or until the date the Works are deemed to have reached Practical Completion pursuant to either of paragraphs 9.09.04 and 9.10.04. 10.22.03 Upon the first to happen of either of the events referred to in paragraph 10.22.02: .01 The Proprietor shall authorise the reduction of the amount of the Bank Guarantee or Bank Guarantees to half of the amount or percentage of the Contract Sum stated in Item S of the Appendix, as applicable; or .02 upon the Builder providing a further Bank Guarantee on like terms and conditions to that or those originally provided by him but equal to one half of the amount or percentage of the Contract Sum stated in Item S of the Appendix, as applicable, the Proprietor shall release the Bank Guarantee or Bank Guarantees so originally provided … 10.25 AVAILABLILITY OF SECURITY Any security provided by the Builder in terms of this Agreement shall be available to the Proprietor whenever the Proprietor shall be entitled to the payment of moneys by the Builder under or in consequence of this Agreement or whenever the Proprietor shall be entitled to reimbursement of any moneys paid to others under this Agreement, in all such cases as if the security were a sum of money due to or to become due to the Builder by the Proprietor,… … 11.09 FINAL PAYMENT Unless notice in writing of a dispute or difference shall have been given pursuant to Clause 13.01 then the final balance referred to in paragraph 11.07.03 shall: 11.09.01 if payable to the Builder, as from the fifteenth day after presentation of the final certificate by the Builder to the Proprietor; or 11.09.02 if payable to the Proprietor, as from the fifteenth day after receipt of the final certificate by the Builder become a debt due and payable by the Proprietor to the Builder or the Builder to the Proprietor, as the case may be, provided that should a notice in writing of a difference or dispute have been given pursuant to Clause 13.01 then payment shall be made of such amount as shall be then not in dispute. Notwithstanding the foregoing provisions of this Clause 11.09 and of any other provisions of this Agreement, if the legislation of the State or Territory in which the Site is situated requires the Builder to provide evidence of payment of wages due to his employees on the Works on or before payment of any amount due to the Builder, the Proprietor shall not be obliged nor liable to pay the amount specified in the final certificate unless and until the Builder complies with such legislation as it applies to payment of the amount the subject of the final certificate. 11.10 RELEASE OF SECURITY The following provisions shall apply to the security maintained effective subsequent to Practical Completion: 11.10.01 Should any amount included in the final certificate be held in a joint account under the provisions of Clause 10.23 then the Proprietor or the Builder, as the case may require shall release his interest in such an amount to the other within the same period as stated in Clause 11.09. Any interest which may have accrued on any amount held in a joint account under the provisions of paragraph 10.23.02 shall as belonging to the Builder be disbursed at his direction. 11.10.02 Should the Builder have provided a Bank Guarantee or Bank Guarantees pursuant to the provisions of Clause 10.20 and paragraph 10.21.01 then the Proprietor shall release his interests therein within the same period as stated in Clause 11.09. 6 On 11 February 1997 two Bank Guarantees were provided by Westpac Banking Corporation in the sum of $48,174 each to cover the amount required by Item S of the Appendix. The Defendant, Hammat Constructions Pty Limited (Hammat) entered into a subcontract with the with the Builder, Hanna & Edmed Pty Ltd to construct a car park and associated road works being part of the works the subject of the head contract of 6 February 1997. At the date of the practical completion of the works on 16 October 1997 the guarantees were to the value of $96,348. After practical completion one guarantee was released to the builder. Pursuant to the head contract of 6 February, the remaining guarantee was to be held for the defects liability period of twenty six weeks from the date of practical completion. The work carried out by Hammat was carried out prior to 30 September 1997. 7 On 31 October 1997 Richard John Denis and Scott Angus Blackwood of Ernst and Young were appointed as receivers of the builder, by Westpac Banking Corporation pursuant to a registered charge held by the Bank over the property of the Builder. On 17 March 1998 Hammat obtained judgment in claim no. 61 of 1998 at the Local Court in Lismore against the Builder in the sum of $33,273.40, and on 3 April 1998 obtained a Certificate pursuant to the Contractors' Debts Act 1897 in that sum. On 8 April 1998 the Certificate and a claim pursuant to the Contractors' Debts Act was served upon the George Feros. Pt2 cl3 and 4 of Schedule 1 to the Act provides that those documents are effective as if issued under the 1997 Act. The defects liability period expired on 16 April 1998. The contract provided for the issue by the architects of a final certificate after dealing with all claims and for final payment within fifteen days of such certificate, the amount certified becoming a debt due by proprietor to builder or builder to proprietor after that fifteen days. The final adjustment letter was issued on 28 July 1998, certifying a sum of $4,916 due by the builder to George Feros. On or about 19 October 1998 George Feros handed the guarantee to the receivers upon payment by the receivers to it of a sum of $4916 certified by the architect as being the sum due on final accounting between the owner and the builder. Decision of the Magistrate 8 The learned magistrate after setting out the facts and the debt due to the owner from the builder said: Pursuant to the Bank Guarantee previously detailed that amount justified the owner in relying upon and activating the terms of the Bank Guarantee but presumably limited to that amount. The Receiver of the contractor however paid the owner the amount due resulting in the owner at no stage seeking to rely on or activating the terms of the Bank Guarantee. As no further funds were perceived to be owed by or on behalf of the contractor to the owner (or vice versa), the undertaking was apparently then handed to the Receiver, that Receiver having been appointed in any event by the Westpac Bank. As stated, in any event the owner at no stage ever sought to receive the funds the subject of the Bank's undertaking from the Westpac Bank. There is no dispute that the subcontractor is owed the amount claimed nor that a valid certificate pursuant to the Contractors Debts Act was served upon the owner following judgment obtained by the subcontractor as against the contractor. Contractors Debts Act provides a regime for subcontractors to obtain from owner's amounts in fact owed to the subcontractors by the contractors, such amounts being legally able to be obtained from funds owed by the owner to the contractor. The Learned Magistrate then set out sections 5, 9 and 11 of the Act, and continued: In support of its contention, the Plaintiff relies on a number of authorities but in particular Australian Conference Association Limited versus Mainline Constructions Pty Ltd and ors, a decision of the High Court of Australia 141 CLR 335 ff . That case, with an important exception, in my view is similar in its terms to the present case. In that case the builder procured a Bank Guarantee by which the Bank unconditionally undertook to the proprietor to pay it on demand the amount provided therein. Shortly after the appointment of a Receiver of the builders undertaking, the proprietor determined the builder's employment. It demanded the security Monies from the Bank and was paid them. It prepared to use the moneys to pay subcontractors for work done but not paid for by the builder before the determination of the builder's employment. It was held by majority that the proprietor was entitled to use the security moneys to satisfy the builder's obligation to the subcontractors. It further held that any surplus remaining after discharging those obligations should be released to the builder and not to the Bank. During the course of the leading judgment, Gibbs ACJ stated (at pg. 350) The contract between the Bank and the appellant - the guarantee - casts on the Bank an unconditional obligation to pay the sum of $126,140 to the appellant should the appellant demand it, without any reference to the state of the accounts between the appellant and Mainline and even in the face of Mainline's objection to the making of any payment. Further at page 351 the following was stated As has been already pointed out, under clause 30(c) the security was to be effective in lieu of the retention fund, and by clause 30(a) the retention fund was "security that the builder shall carry out his obligations under the contract". It follows that the appellant was entitled to resort to the security for the purpose of ensuring that Mainline carried out its obligations under the contract. The combined effect of these provisions was that the appellant was entitled to call on the Bank to honour its undertaking to pay the money and to use the money this provided for the purpose of satisfying those obligations of Mainline which Mainline itself had not satisfied. Still later at pg. 355 the following In short I consider that the money provided by the Bank under the Guarantee could properly be used by the appellant for the payment of subcontractors in the circumstance permitted by clause 22(c)(ii) and that the appellant is now entitled to use it in making payments to the subcontractors. In each of the comments the Court was considering the entitlement of the owner in that case to activate the Bank Guarantee. It further considered the position when that Bank's Guarantee was in fact activated. In this case of course the owner never sought to activate the Guarantee due to the apparent view that the necessity did not arise. Their contention is that no moneys were owed to it necessitating the activation or reliance upon the Bank Guarantee. The question then becomes did the notification of the subcontractors debt by service of the claim pursuant to the Contractors Debts Act create a situation that the defendant was in fact obliged to activate and utilize the guarantee? I now turn to the provisions of the contract between the owner and the proprietor. Clause 10.20 provides for the provision of security by the builder "for the due performance of his obligations under this agreement" [sic] The form of security was in this case the bank guarantee but could have been by way of progressive retention. Clause 10.25 in turn provides "any security provided by the builder in terms of this agreement shall be available to the proprietor whenever the proprietor shall be entitled to the payment of moneys by the builder under or consequence of this agreement or whenever the proprietor shall be entitled to reimbursement of any moneys paid to others under this agreement, in all such cases as if the security were sum of money due to the builder by the proprietor, provided that if the employment of the builder under this agreement is determined by the builder pursuant to clause 12.01 and the proprietor holds security provided by the builder the proprietor shall not be entitled to have recourse to that security unless and until an enabling award is made or an enabling judgment is given (whether pursuant to clause 13 or otherwise) or the builder agrees in writing that the proprietor is so entitled. Pursuant to the Contractors Debts Act (Sec 9) "After a notice of claim is served on a principal …" the principal must pay the money owed to the defaulting contractor to the unpaid person " Again clause 10.25 provides that the retention is deemed to be "a sum of money… due to the builder by the proprietor" and therefore was available as at the date of service of the claim. I am satisfied therefore that as at the 8th April 1998 there was effectively an amount of $48174:00 deemed to be "a sum of money due to or to become due to the builder by the proprietor" and therefore the amount of the claim should have been obtained by the defendant from the bank and paid to the plaintiff in satisfaction of the judgement debt. Grounds of Appeal 9 The Grounds of appeal are as follows: 1. The Magistrate erred in interpreting the contract between the plaintiff and Hanna & Edmed Pty Limited of 6 February 1997 as meaning that, as at 8 April 1998, there was effectively an amount of $48,174 owed by Hanna & Edmed Pty Limited to the plaintiff. 2. The Magistrate erred in interpreting section 9 of the Contractors' Debts Act as meaning that service on the plaintiff of a notice under the Act created an obligation on the plaintiff to call up the security which had been provided to it by Hanna & Edmed Pty Limited for the due performance by that company of its obligations under the contract with the plaintiff of 6 February 1997, and to pay that security to the defendant. 10 The plaintiff did not press its third ground of appeal. The Law 11 The plaintiff put two arguments as to why the judgement of the Magistrate should be overturned. First the plaintiff submits that the amount of the Bank Guarantee was not available to the builder under clause 10.25 unless three conditions were satisfied: (1) that money was owed by the builder by the proprietor; (2) that the failure to pay money was a breach of contract such as to make the security enforceable; and (3) that the proprietor had called up the guarantee. Second, the plaintiff argues that because at the date of service of notice the contract price had been paid by the owner to the builder in full, the owner would have a complete defence against any claim by the builder so that s11(4) of the Act would operate so as to defeat this claim. 12 I deal with these arguments in turn. The first argument of the plaintiff really goes to the plaintiff's first ground of appeal and attacks the magistrate's finding that the $48,174 held by the principal in the form of a bank guarantee was "money that is payable or becomes payable to the defaulting contractor by some other person (the principal)." within the meaning of s5(1) of the Act. Clause 10.21 of the building works contract provided that security could be provided either by the principal retaining part of the contract price in a bank account or by the builder providing a bank guarantee. Clause 10.25, as set out above, provided conditions for the availability of such security to the proprietor and that "in all such cases as if the security were a sum of money due to or to become due to the Builder by the Proprietor". It was this phrase which was relied upon by the learned Magistrate and which Hammat claimed had the effect of deeming the Bank Guarantee to be money payable to the defaulting contractor the subject of the statutory assignment. 13 Any right to obtain payment requires the sub-contractor's claim to fall within s5 of the Act. This requires payment out of money that is payable or becomes payable to the defaulting contractor for work or materials that the principal (proprietor) engages the defaulting contractor (builder to carry out). Unless the security bond is money the claim must fail. But more importantly, even if it is, all moneys payable under the contract to the builder had been paid. In other words there were no moneys owing to the builder for work or materials. The builder had been paid in full and in fact overpaid. I do not think that it could be said that the obligation to return the security is a payment for work or materials. 14 While what I have just said would be a complete answer to the question, there are other significant matters which were argued. As a result of the final adjustment letter of 28 July 1998, the builder owed $4,916 to George Feros. Clause 12.09 gave a period of fifteen days for payment by the builder which would have expired in the middle of August. It is not clear on what day the receivers paid the amount to George Feros, but it can be accepted that this was on or before 19 October 1998, which was the day the security was released to the builder. On that basis, pursuant to clause 10.25 the security by mid-August became available to the owner, but I can see no basis for the finding of the Magistrate that as at 8 April 1998 there was an amount of $48,174 "deemed to be a sum of money due to or to become due to the builder". Assuming that some time in August the owner could have called upon the bank for payment of the full amount of the security (which I doubt and which the Magistrate also doubted) the balance would have been a sum due to the builder but it would not have been money due for work carried out, as the builder had been paid in full for such work. 15 The reason why I have doubted the ability to call up the total amount of the security is that the purpose of the security was to provide against breach of contract by the builder. The breach of contract would have been the failure to pay the $4,916 within fifteen days. It is perfectly clear, and the security bond provides, that it need not be called upon in total, but can be called upon for any amount or amounts until the total amount of the liability under the bond has been paid. I cannot see that it would be proper for the proprietor to call up the security thereby making moneys available or due to the builder. After all the security was to secure the proprietor, not the builder. In any event, if it were the position that a full call could be made the moneys would not be moneys due to the builder for work done or materials provided because full payment had already been made to the builder for that. 16 The learned magistrate and counsel for the defendant contractor placed reliance on the decision in Australasian Conference Association Limited v Mainline Constructions Pty Limited (in liq) (1978) 141 CLR 335. The first thing to be said about that case is that the owner had called up the security pursuant to its rights under the contract. Under the relevant contract the proprietor was entitled to have recourse to the security in the event of the employment of the builder being determined. It was determined as a result of a receiver being appoint to the builder. Upon that happening the proprietor was authorised to pay to any sub-contractor amounts owing for work executed pursuant to the building contract if the sub-contractor had not been paid by the builder and was entitled to pay any such sub-contractor who did work on the project after termination. The court held by majority that, as upon the architect giving the final certificate taking into account payments by the owner to sub-contractors and the costs of completion of the building after determination of the building contract with Mainline, there was an amount held as a surplus from the security moneys then those surplus moneys should be paid to the builder and not the bank liable under the security bond. The court did not hold that those moneys were moneys for work done or material provided by the builder under the head contract. The contest was between the bank as guarantee provider and the builder as to entitlement to the surplus security moneys and the decision was given in favour of the builder. That decision in no way overcomes the problems of the defendants under s5 of the Act, nor does it determine that there was some obligation to call up the security rather than a right to do so; nor that the security was "money". 17 Counsel for the defendant placed considerable reliance on the purpose of the Act. He said that, as it was remedial, and its intention was to assist sub-contractors, that intention should be given effect to in construing the Act if that were possible. He pointed out that the intention of the Act would be largely negated if builders could evade its useful operation by providing a security in lieu of a retention fund. This is probably correct, at least in the case of contracts which do not extend over a considerable period. However, construing the Act in light of its purpose, is no reason to construe it as saying something not said. To achieve the result counsel argues for it would be necessary to hold either that the Act required the activation of the security or that the security uncalled was money payable or to become payable to the builder. I do not consider the Act imposes any such obligation; if the contract does not do so; neither do I consider the security to be money. It was a contract between bank and proprietor under which money might become available. Clause 10.25 would entitle the owner to call on the security for the amount of money due by the builder to it, namely $4,916, or it might entitle the owner to call up the whole of the security and to make the necessary adjustments to it by way of set off before determining the balance due to the builder. However, on no basis can I see that this in some way deems the security itself to be moneys due to the builder so as to bring the provisions of s5 into operation and, as I have said, the builder had been paid in full. All liability pursuant to a statutory assignment of debt depends upon the debt falling within s5 of the Act. For that reason I consider the second ground of appeal also succeeds. Conclusion 18 It follows that the appeal should be allowed. The decision of the Magistrate must be set aside. There is nothing to be gained in remitting the claim back to him. This is a case where the defendant's claim against the plaintiff should be dismissed. Orders 1. Set aside the decision of the Magistrate. 2. In lieu thereof order that there be judgment for the defendant (plaintiff in this Court) with costs in the proceedings in the Local Court. 3. Order the defendant to pay the plaintiff's costs of this appeal. 4. Defendant to have certificate under Suitors Fund Act. 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