On 24 December 2018, cracking in concrete panels was discovered in Opal Towers. Residents had reported loud banging noises, which were initially suspected to be caused by a bomb.

Experts appointed by the NSW Minister for Planning and Housing concluded that the cracking was caused by deficiencies in design and construction of the building.

After expending $25 million in rectifying the defects, Icon Co has been unsuccessful in its attempt to restrain Australia Avenue Developments (AAD) from encashing an AU$3.9m performance bond, following a call by AAD on 4 February 2020.

Whilst it may come as little surprise that the performance security on Opal Towers has been encashed, the case is a reminder of the power and importance of a broadly drafted recourse clause.

5 March 2019

Icon Co (NSW) Pty Ltd v Australia Avenue Developments Pty Ltd [2020] NSWSC 178

On 4 February 2020, AAD gave notice to Icon Co that it intended to call on the AU$3.9m performance bond provided by Icon Co to AAD to secure performance under its contract to construct Opal Towers in Sydney Olympic Park, New South Wales.

The call related to claims by AAD, advised to Icon Co by separate letter on 4 February 2020, for the costs of defending a class action commenced by the residents of Opal Towers, damages for breach of contract relating to the defects, damages by reason of  Icon Co failing to indemnify AAD, and additional costs incurred for administering the contract.

The structural issues with Opal Towers have been well documented in the media. In a report delivered to the NSW Minister for Planning and Housing, experts concluded that the cracking was caused by deficiencies in design and construction including:

  1. an under-designed hob beam/panel assembly;
  2. grouting between joists between hob beams and panels raising stress levels in hob beams on four levels of the tower;
  3. damage to concrete panels as a consequence of hob beam failures.

In response to the threatened call, Icon Co sought an urgent injunction from the Supreme Court of New South Wales preventing AAD from encashing the performance bond.

In order to be entitled to the injunction, Icon Co was required to demonstrate:

  1. a prima facie case that AAD was not entitled to call upon the performance bond under the terms of the contract;
  2. that the balance of convenience favoured the granting of relief; and
  3. that damages would be an inadequate remedy if the injunction was refused.

The contractual right to recourse

The contract between Icon Co and AAD provided that Icon Co was required to provide security ‘for the purpose of securing the proper performance of [its] obligations to the Principal under the Contract’. AAD’s right to recourse under the contract was governed by clause 5.2, which is set out below:

5.2 Recourse

It is the intention of the parties that:

(a) [AAD] may have recourse to any security if any of the following events (“Security Recourse Event”) occur:

(i) where [AAD] (as the case may be) is entitled to exercise a right under the Contract in respect of the security;

(ii) where [Icon Co] has failed to comply with a material obligation under the Contract;

(iii) where there is a debt payable by [Icon Co] to [AAD]; or

(iv) subject to clause 37.4, to meet any genuine bona fide claims that [AAD] may have against [Icon Co] arising out of or in connection with the termination of the Contract,

the parties acknowledge and agree that if any of the events in subclause 5.2(a)(i) to subclause 5.2(a)(iv) occur, the Principal may (subject to [AAD] have given [Icon Co] at least 5 days’ notice of the Security Recourse Event) have recourse to any security…”

AAD contended that it was entitled to call upon the performance bond under clause 5.2 on the basis that:

  1. it was entitled to exercise a right, under clause 5.2(a)(i); and
  2. Icon Co had failed to comply with a material obligation, under clause 5.2(a)(ii).

AAD’s entitlement to exercise a right

AAD’s argument that it was entitled to exercise a right under the contract in respect of the security was based on an alleged entitlement under clause 37.4 of the contract. The clause, which is set out in full below, allowed AAD to deduct from security any “debt due” or “moneys claimed” by AAD from Icon Co.

37.4 Deduction of Moneys

Any debt due from [Icon Co] to [AAD] or moneys claimed by [AAD] from [Icon Co] under or in connection with this Contract or the WUC  may be deducted by [AAD] from:

(a)    any moneys which may otherwise become payable to the Contractor by the Principal; and

(b)    any security held by the Principal.

This clause does not affect the right of the Principal to recover the debt, the moneys claimed or any balance after exercising any rights under this clause by any other means available under this Contract or at law.”

Stevenson J observed the important differences between the words “any debt due” and “moneys claimed” in clause 37.4. His Honour accepted that a “debt due” may require that the debt be established as a matter of objective fact (adopting the language of Macfarlan JA in Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd [2010] NSWCA 283), or as a result of  Icon Co being “actually in default” (adopting the language of White J in Universal Publishers Pty Ltd v Australian Executor Trustees Ltd [2013] NSWSC 2021).

Conversely, his Honour accepted that “moneys claimed” by AAD from Icon Co required no more than for AAD to make a genuine or bona fide “claim” to money – which AAD had done in its separate letter of 4 February 2020. Provided that the claim was “non-fraudulent” and “genuine”, there was no further requirement that AAD was, as a matter of objective fact, entitled to the amounts claimed.

In response to AAD’s reliance on its entitlement to have recourse for “moneys claimed”, Icon Co asserted (in essence) that the words “moneys claimed” should be read as something to the effect of “moneys that AAD is entitled to claim”. His Honour rejected this argument on the basis that it did violence to the wording of clause 37.4, ignored the important distinction between “debt due” and “moneys claimed”, and essentially sought to rewrite the clause.

The distinction between “debts due” and “money claimed” is of vital importance for the effective operation of a security clause that is intended to allocate risk between the parties pending the resolution of the dispute. The majority of principals have an expectation that in the event of default or a dispute, security will be available “on demand”. Consistent with that approach, it is typically viewed as antithetical to the purpose of performance security to require a principal to establish, by way of protracted legal proceedings, that it is objectively entitled to the sums the subject of the call prior to being entitled to have recourse to the security.

For that reason, it is essential that clauses governing the right to recourse to security are structured in such a way as to achieve the intended purpose of the security. For performance security (as distinct from security against the insolvency of the builder) this requires security clauses to be drafted with a broad right of recourse, including based on a subjective claim to entitlement by the principal. 

Icon Co’s failure to comply with a material obligation

AAD also asserted it was entitled to have recourse on the basis that Icon Co had failed to comply with a material obligation under the contract – namely, its obligation to “execute the WUC in a proper and workmanlike manner and in accordance with the high quality workmanship of the various trades involved”.

In response, Icon Co argued that any material breach of that obligation could only be assessed at final completion, because up until that time it was continuing to execute the WUC by undertaking rectification works.

Stevenson J rejected that argument on the basis that Icon Co’s obligations extended to “the work which the [Builder] is required to carry out and complete under the Contract” as well as any “remedial work” that might be required by reason of shortcomings in work done earlier”. Therefore, a failure to carry out and complete the works in a proper and workmanlike manner may be a breach notwithstanding that the builder is separately obliged to carry out remedial work.

Additionally, Stevenson J referred to and relied upon Hammerschlag J’s rejection of the “temporary disconformity theory” in the following passage of Owners of Strata Plan 80458 v TQM Design & Construct Pty Ltd [2018] NSWSC 1304:

“If a contract requires work to be done in a proper and workmanlike fashion and the builder does defective work, it is difficult to understand why, even if the work is later remedied, there was no initial breach. The contract might provide a mechanism to assuage the breach and avoid loss which might otherwise be suffered if the breach were not remedied, but the initial breach still occurred. The conventional approach would be to consider whether given other contractual provisions and the conduct of the employer, the employer has an exigible claim for damages.”

This suggests that conduct constituting a breach (such as carrying out defective works) cannot be excused as the completion of incomplete works or performance of ongoing obligations merely because the builder will rectify the breach as part of its later performance of its contractual obligations.

Accordingly, Stevenson J held that Icon Co was not entitled to restrain AAD from making a call either in respect of AAD’s entitlement to exercise a right in respect of “moneys claimed” or in respect of Icon Co’s alleged failure to comply with a material obligation.

Damages are an adequate remedy

It is common for parties seeking to restrain a call upon performance bonds to assert that a call will cause irreparable harm to their business reputation and financial standing which is not readily curable by an award of damages. This line of argument has received a mixed reception in a number of first instance decisions throughout Australia. The success of the argument largely turns on the availability of compelling evidence of a specific risk of harm in the circumstances of the case. 

Icon Co provided evidence of a general nature to the effect that a call on the performance bond would cause it difficulties in obtaining security in the future due to damage to its reputation.

However, this argument was largely neutralised by AAD advising Icon Co prior to the hearing of the injunction that, in the event that the injunction was refused, AAD would accept a cash payment from Icon Co in lieu of converting the performance bond. 

On the basis of AAD’s agreement to accept a cash payment from Icon Co, his Honour rejected AAD’s arguments concerning reputational harm because, regardless of the outcome of the proceeding, there would be no call on the performance bond.


Christopher Rowden | Principal
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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