The very recent decision of Descon Group Australia Pty Ltd v 35 Merivale Pty Ltd [2023] QSC 276 has now formed part of the long list of authorities whereby the courts have refused to injunct or restrain a Principal from calling upon and cashing security under a construction contract.
In this decision, the Queensland Supreme Court considered an application by Descon (the Contractor) for an injunction restraining 35 Merivale (the Principal) from having recourse to insurance bonds provided as security under a construction contract.
CDI acted on behalf of the Principal. Justice Davis ultimately dismissed the application.
Justice Davis did so on the grounds that:
- the Contractor failed to demonstrate a prima facie that the Principal was not entitled to call on the bonds;
- the Principal had a certified claim against the Contractor for $3,557,275.01 under the contract. Therefore, the balance of convenience favoured an injunction not being granted. As a result, the Principal was entitled to call upon the Security.
Key Facts
The parties entered into an amended AS4902-2000 contract under which the Contractor undertook the design and construction of an apartment tower known as the “Akin Residences” in South Brisbane (the Contract).
The Contractor provided the Principal security in the form of two unconditional insurance bonds equal to 5% of the contract sum as required by the Contract.
Clause 5.2 governed the Principal’s right to have recourse to security and relevantly provided that:
The Principal may have recourse to security:
- for any amount due, as a debt arising under the Contract, to the Principal which remains unpaid after the time for payment, or where there is no time for payment specified, remains unpaid after 5 business after demanding payment; or
- in respect of any claim to payment (liquidated or otherwise), the Principal may have against the Contractor under the Contract which remains unpaid after 5 business days after demanding payment.
The parties subsequently entered into a side deed. Clause 9.1(d)(i) enabled the Principal to call upon the bonds “immediately and without notice or reference to, or the consent of, the Builder where work has been taken out of the hands of the Builder”.
On 3 October 2023, the following events occurred:
- the Principal took the works out of the Contractor’s hands; and
- the Contractor obtained an ex parte injunction from the Court temporarily restraining the Principal from having recourse to the insurance bonds.
Decision
On 1 December 2023, Justice Davis dissolved the injunction made on 3 October 2023 on the grounds that:
- the Contractor failed to demonstrate a prima facie case that the Principal had no entitlement to call on the bonds; and
- the Principal’s claim for $3,557,275.01 was certified under the Contract (in contrast to the Contractor’s uncertified claims) and therefore, it could rely upon clause 5.2 of the Contract to call on the bonds (upon providing 5 business days’ notice) in any event.
Takeaway
For a principal to have an immediate right to have recourse to security, it must:
- ensure the contract is drafted such that the principal has an unfettered ability to have recourse to the security in circumstances where:
- it claims to be entitled to an amount from the contractor (as distinct from actually being entitled to an amount); or
- the contract has been terminated; or
- the principal has taken work out of the contractor’s hands;
- ensure that if the contract contains pre-conditions to its right to have recourse to security (e.g., that notice must be provided to the contractor), those conditions are satisfied before it attempts to have recourse.
In addition, parties seeking to have recourse to security should also consider any relevant statutory obligations that may impede a call to security, such as section 67J of the Queensland Building and Construction Commission Act 1991.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader’s specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances, please contact one of the named individuals listed.
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