Under this standard form, a proprietor may use guarantee moneys to pay sub-contractors after termination of the builder's employment, and the surplus is payable to the builder not the guarantor bank, though the decision was closely divided (3-2).
Later decisions that cite Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (In Liq)
Decisions cited by Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (In Liq)
AUSTRALASIAN CONFERENCE ASSOCIATION LTD. v. MAINLINE CONSTRUCTIONS PTY. LTD.
(IN LIQ.) [1978] HCA 45; (1978) 141 CLR 335
Building Contracts
High Court of Australia
Gibbs A.C.J.(1), Stephen(2), Jacobs(3), Murphy(4) and Aickin(5) JJ.
CATCHWORDS
Building Contracts - Construction - Security in lieu of retention fund - Whether building owner may pay sub-contractors out of security moneys - Entitlement to surplus after payment - Subrogation.
HEARING
Sydney, 1978, April 10-11; November 24. 24:11:1978DECISION
Nov. 24.
2. On the 30th April 1971 a contract was executed between the appellant as
proprietor and Mainline as builder for the construction
of extensions and
alterations to the Sydney Sanitarium and Hospital, Fox Valley Road, Wahroonga,
for a price which, as adjusted,
amounted to $6,303,805.44. The contract was in
a standard form. By sub-cll. (a) and (b) of cl. 22 of the conditions the
proprietor
was empowered to determine the employment of the builder in certain
events. Clause 22 (a) dealt with cases in which the builder made
default by
suspending the carrying out of the works before practical completion, or
failing to proceed with the works with reasonable
diligence or in a competent
manner, or refusing or persistently neglecting to comply with a written notice
from the architect in
certain circumstances. None of the events mentioned in
cl. 22 (a) occurred in the present case. Clause 22 (b) provided as follows:
"In the event of the Builder having an execution levied against him or
becoming bankrupt or entering or attempting to enter
into any composition or
arrangement with his creditors or being a company having an execution levied
against it or a winding up order
made or (except for the purposes of
reconstruction) passing or attempting to pass a Resolution for winding up or
being a party to
the appointment of or having an Official Manager appointed or
on the appointment of a Receiver of the whole or any part of its property
or
undertaking or being a party to or attempting to enter into any composition or
Scheme of Arrangement then the Proprietor may forthwith
without predjudice to
any other rights or remedies by written notice delivered by certified mail to
the Builder determine the employment
of the Builder under this Contract."
The consequences of a determination of the employment of the builder under the
clause were dealt with in sub-cl. (c) of cl. 22 which
provided as follows:
"In the event of the employment of the Builder being determined pursuant
to this clause the following shall be the respective
rights and liabilities of
the Proprietor and the Builder:
(i) The Proprietor may employ and pay other persons to carry out and
complete the Works and the Proprietor or any such aforesaid
persons may enter
upon the Works and use all temporary buildings, plant, tools, equipment, goods
and materials intended for, delivered
to and placed on or adjacent to the
Works and may purchase all materials and goods necessary for the carrying out
and completion
of the Works in accordance with this Contract.
(ii) The Builder shall if so required by the Proprietor or Architect
within 14 days of the date of determination assign to the
Proprietor without
payment the benefit of any agreement for the supply of materials or goods
and/or for the execution of any work
for the purposes of this Contract but on
the terms that a supplier or sub-contractor shall be entitled to make any
reasonable objection
to any further assignment thereof by the Proprietor. In
any case the Proprietor may pay any supplier or sub-contractor for any
materials
or goods delivered or works executed for the purposes of this
Contract (whether before or after the date of determination) in so
far as the
price therefor has not already been paid by the Builder. The Proprietor's
rights under this paragraph are in addition
to his rights to pay nominated
sub-contractors as provided in these Conditions and payments made under this
paragraph may be deducted
from any sum due or to become due to the Builder.
(iii) The Builder shall as and when required in writing by the Architect
so to do (and not before) remove from the Works any
temporary buildings,
plant, tools, equipment, materials, and goods. If within a reasonable time
after receipt of such request the
Builder does not comply therewith, then the
Proprietor may, not less than 14 days after notifying the Builder in writing
of his intention
(but without being responsible for any loss or damage) remove
and/or sell any such property of the Builder holding the proceeds less
all
reasonable costs incurred to the credit of the Builder.
(iv) Until completion of the Works pursuant to paragraph (i) of this
sub-clause, the proprietor shall not be bound by any provision
of this
Contract to make any further payment to the Builder but as soon as is
reasonable thereafter, having regard to the rights
of the Proprietor under the
said paragraph, the Architect shall ascertain the amount of costs properly
incurred by the Proprietor
pursuant to the said paragraph and the amount of
any direct loss and/or damage caused to the Proprietor by the determination
and
any other liability of the Builder to the Proprietor under this Contract
and shall certify all of the same and if such aforesaid
amounts when added to
the moneys paid to the Builder before the date of determination result in a
total amount in excess of that
which would have been otherwise payable under
this Contract the difference shall be a debt payable to the Proprietor by the
Builder;
and if the said amounts when added to the said moneys result in a
lesser total than that which the Proprietor would otherwise have
been required
to pay under this Contract, then the difference shall be a debt payable by the
Proprietor to the Builder.
(v) The Builder and/or any person authorized by him and approved by the
Architect shall be granted access to the Works at all
reasonable times for the
purpose of inspecting, surveying or measuring the same."
By cl. 23 the builder was given power in certain events to suspend the
operation of the works or to determine his own employment.
(at p341)
3. By cl. 30 (a) of the conditions it was provided that an amount referred to
in the conditions as the retention fund should be
retained by the proprietor
in accordance with cl. 30 (b) "as security that the Builder shall carry out
his obligations under this
contract". The retention fund was to be built up by
deducting from each progress payment 10 per cent of the architect's estimate
of the contract value of the work in respect of which the progress certificate
was issued, provided that the total of the fund did
not exceed $252,280: cl.
30 (b), and the Appendix. An alternative course was however offered to the
parties, viz, that the builder
might, if the proprietor agreed, provide a
security in lieu of the retention fund. This was provided for by cl. 30 (c)
which was
in the following terms:
"Should the Proprietor so agree, the Builder may provide a bank
guarantee, guarantee bond or other form of security acceptable
to the
Proprietor equivalent (unless otherwise agreed) to the amount stated in the
Appendix to these Conditions as Limit of Retention
Fund and in such event same
shall be effective as security in lieu of the Retention Fund referred to in
sub-clause (a) of this clause
and the provisions of sub-clause (b) of this
clause shall not apply."
The application of the retention fund was governed by cl. 30 (d), (e), (f) and
(g). By cl. 30 (d), if the limit of fund exceeded
$4,000 the amounts retained
were to be paid to the credit of an interest-bearing deposit in the joint
names of the proprietor and
the builder, and the amount in the joint deposit
was to be held "upon trust for the Proprietor subject to the provisions of
sub-clauses
(e) and (f) of this clause except that in the event of the Builder
determining his employment pursuant to cl. 23 of these Conditions,
the rights
and interests of the Proprietor in respect of such an amount shall be and are
hereby transferred to the benefit of the
Builder". (at p342)
4. Sub-clauses (e) and (f) of cl. 30 were in the following terms:
"(e) Within 7 days of the issue of the Notice of Practical Completion
pursuant to clause 25 of these Conditions, or within
21 days of the date on
which the Works are deemed practically completed pursuant to the said clause,
the Architect shall issue a
progress Certificate to the Builder for one half
of the amount held in the Retention Fund (or such lesser amount after taking
into
account any sum due by the Builder to the Proprietor pursuant to any
provision of this Contract) and:
(i) Where the Retention Fund is held in a joint deposit pursuant to
sub-clause (d) of this clause, the Proprietor and the Builder
shall within a
further 7 days jointly arrange for the payment to the Builder from such joint
deposit the amount of the said progress
Certificate together with all interest
accrued on such joint deposit; or
(ii) Where the Retention Fund is held by the Proprietor, he shall within 7
days of presentation of the said progress Certificate
to him by the Builder
pay to the Builder the amount of such progress Certificate.
(f) The amount held in the Retention Fund following the operation of
sub-clause (e) of this clause shall be taken into account
by the Architect in
determining the amount of the Final Certificate pursuant to sub-clause (b) of
clause 31 of these Conditions to
be issued to the Builder pursuant to that
sub-clause provided that if any of the circumstances described in clause 23 of
the said
Conditions arise, the amount so held, if in a joint deposit pursuant
to sub-clause (d) of this clause, together with the interest
accrued thereon,
shall be deemed to be in trust for release to the Builder."
Where the limit of the retention fund was less than $4,000 the amounts
retained were to be held by the proprietor "in trust for the
Builder": the
builder's beneficial interest therein was however subject "to the right of the
Proprietor to have recourse thereto
from time to time for payment of any
amount to which he is entitled under the provisions of this Contract to deduct
from any sum
due or to become due to the Builder": cl. 30 (g). The security
provided in lieu of a retention fund was to be dealt with in accordance
with
cl. 30 (h) which provided as follows:
"Where the Builder with the Proprietor's agreement provides a security
pursuant to sub-clause (c) of this clause thus rendering
the Retention Fund
provisions of this clause not applicable such security shall be maintained
effective until the issue by the Architect
of the Notice of Practical
Completion pursuant to clause 25 of these Conditions or until the date the
Works are deemed to be practically
completed pursuant to that clause and
thereafter, upon the Builder providing a further security equal to one half of
the first-provided
security, such first-provided security shall be released.
The second security shall be released in accordance with sub-clause (j)
of
clause 31 of these Conditions. The provisions of this sub-clause are subject
to the Proprietor's right to have recourse to any
security provided by the
Builder in the event of any of the circumstances described in clause 22 of
these Conditions arising, or
if the employment of the Builder is determined
thereunder. If any of the circumstances described in clause 23 of these
Conditions
arise, and if the Builder determines his employment pursuant to
that clause, the Proprietor shall release his interest in any such
security
immediately upon written notice from the Builder to do so." (at p343)
5. By cl. 31 provision was made for the issue of a final certificate by the
architect, and for final payment. Clause 31 (j) was
in the following terms:
"If the Builder has provided security to the Proprietor for the purposes
of this Contract then within 7 days of the presentation
of the Final
Certificate
(i) If the final balance is nil or shows an amount due by the Proprietor
to the Builder, the Proprietor shall do all things necessary
to secure release
of the said security to the Builder, and
(ii) If the final balance shows an amount due by the Builder to the
Proprietor the Proprietor upon receiving payment of the amount
due by the
Builder shall do all things necessary to secure release of the said security
to the Builder." (at p343)
6. At some time after the contract was made the appellant agreed with
Mainline pursuant to cl. 30 (c) of the contract that the provision
of a bank
guarantee would be acceptable to it in lieu of the retention fund. On the 2nd
February 1973 the Bank issued to the appellant
a document in the following
form:
"AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITEDthe Contractor) and in consideration of Australasian Conference Association Limited (hereinafter called the Association) dispensing with the provision of a retention fund to be held against the Contractor referred to in the contract for construction of a building for the Australasian Conference Association Limited entered into by the Contractor with the Association, Australia and New Zealand Banking Group Limited (hereinafter called the Bank) unconditionally undertakes to pay on demand any sum which may from time to time be demanded by the Association to a maximum aggregate sum of One hundred and twenty six thousand one hundred and forty dollars ($126,140).
Bank Guarantee
To: Australasian Conference Association Limited
1. At the request of Mainline Constructions Pty. Ltd. (hereinafter called
7. The work under the contract proceeded satisfactorily. On 20th August 1974, when the work was nearing completion, Mr. Jamison, the second respondent, was appointed receiver and manager of the property of Mainline by the Bank, which was a secured creditor of Mainline. An arrangement was made for the work to continue to be done by Mainline and the work did continue under that arrangement for a short time. However on 11th September 1974 the appellant gave written notice under cl. 22 (b) determining the employment of Mainline under the contract. After the contract was terminated the work was completed by the appellant in association with the architect. For this purpose the appellant engaged former employees of Mainline and some of its own staff, and retained sub-contractors who had previously been employed on the job by Mainline. The work was completed in about December 1974, and the appellant paid the wages due to the employees and the amounts due to the sub-contractors for the work done after 11th September 1974. As will be seen, certain sub-contractors engaged by Mainline before 11th September 1974 had not been paid for the work done or materials supplied before that date, and the appellant wished to pay them. (at p345)
8. On 16th December 1974 liquidators of Mainline were appointed by the Supreme Court of New South Wales. (at p345)
9. On 7th January 1975 the appellant requested the Bank to pay it the amount of the guarantee to enable it "to make payments to sub-contractors for the completion of the works". On 13th January 1975, the Bank complied with the request and sent the appellant a bank cheque for $126,140, but stated that it reserved its rights to recover from the appellant "any difference between the amount paid to you and the total amount which would have been deducted by way of retention money under the contract up to its termination had the guarantee not been given". By this reservation the Bank apparently intended to assert that under the guarantee it was liable to pay to the appellant no more than the amount which would have been in the retention fund if the provisions of cl. 30 (b) had continued to apply. A similar contention was subsequently rejected by the Court of Appeal Division in St. Martins Grosvenor Pty. Ltd. v. American Home Assurance Co. Unreported; 18th March 1977. and this point was not pursued before us. (at p345)
10. On 30th January 1975 three documents were issued by the architect. The first and second of these documents, described respectively as "contract statement" and "statement of expenditure of available funds after date of appointment of receiver and manager . . .", when read together show that the amount paid to Mainline before the determination of its employment under the contract, plus the cost of completing the work after that determination, exceeded the adjusted contract price by $388.24. The third document, headed "list of defaults in payments to sub-contractors", was in fact prepared by an employee of the appellant; it showed that the total amount due to sub-contractors was $116,259.90. The evidence shows that this sum was in respect of work done or materials supplied at the direction of Mainline before 11th September 1974 and that it did not include any sums due to nominated sub-contractors. Although some at least of the sub-contractors in this list were retained after 11th September 1974, there is no evidence that the appellant promised to pay the amounts due to them at that date as an inducement to them to continue with the work. (at p346)
11. On 14th April 1975 the appellant's solicitors wrote to the liquidators requesting their acknowledgement that the payment by the appellant of the amounts due to the sub-contractors would be authorized by the contract and would not constitute a preference, and stated that if the liquidators did not agree to this proposal proceedings would be instituted. The liquidators' solicitors replied on 22nd May 1975 and declined to give the acknowledgement sought. By agreement the moneys provided by the Bank were paid into an interest-bearing account to abide the result of proceedings. Some time in August 1975 a summons was taken out by the appellant against the first and second respondents. The sub-contractors were not in fact paid the amounts in question. (at p346)
12. The proceedings were heard by Bowen C.J. in Eq. (as he then was), who made a declaration that pursuant to cl. 22 (c) (ii) of the contract the appellant is entitled to pay to the sub-contractors named in the schedule to the order the amounts there set forth totalling $116,259.90 "out of the fund held by" the appellant. He further ordered that the costs of the appellant "be paid out of the balance of the funds remaining in the fund held by" the appellant and that the sum remaining be paid to the Bank. From this decision the second respondent appealed to the Court of Appeal. That Court ordered, by consent, that the Bank be added as a defendant to the summons, and as an appellant to the appeal. By a majority, the appeal was allowed, and the appellant was ordered to pay to the Bank the sum of $125,751.76. That sum represents the amount of $126,140 paid to the appellant by the Bank, less the sum of $388.24 which was the amount by which the total cost of completing the contract exceeded the adjusted contract price, and which it is conceded that the appellant is entitled to retain. From that decision the present appeal is brought. (at p346)
13. Throughout all these proceedings Mainline has taken a neutral attitude, being content to abide by whatever order the Court may make. (at p346)
14. The Bank has objected to the competency of the appeal. It submits that the appellant is in a position analogous, to that of a stakeholder of the sum in respect of which the judgment appealed from has been given, since the appellant proposes to use part of that sum to pay the sub-contractors and concedes that it is not entitled to the balance. Therefore, it is submitted, the appellant has no interest in the proceedings or in the money to which they relate, and no right of appeal. This submission is untenable. By s. 35 (3) (a) of the Judiciary Act an appeal may be brought as of right from a final judgment of a Full Court of the Supreme Court of a State given or pronounced (inter alia) "(a) for the sum of $20,000 or upwards". The judgment against the appellant answers that description. The appellant therefore has a right of appeal, even if it were correct to say that it has no beneficial interest in the money in question or in the proceedings. In any case the order appealed from is not that the appellant deliver up a particular fund to which it holds title but in which it asserts no interest; it is an order to pay a sum of money, and an appellant has a very real interest in proceedings in which such an order has been made against it. The objection should be overruled. (at p347)
15. An initial difficulty in the way of the Bank's claim to recover from the appellant any part of the sum of $126,140 would appear to be that the Bank paid that sum to the appellant pursuant to its unconditional undertaking to do so. The money was paid voluntarily, and it was not paid under any mistake of fact. Nevertheless it was submitted on behalf of the Bank that the appellant was obliged to account to the Bank for any surplus remaining after the sum provided under the guarantee had been used by the appellant for those purposes for which, under the contract, the appellant was entitled to apply it. It was submitted that this liability of the appellant arose either because the Bank was a surety of Mainline, or in a position analogous to that of a surety, or because the principles stated in Barclays Bank Ltd. v. Quistclose Investments Ltd. [1968] UKHL 4; (1970) AC 567 were applicable to the present case. (at p347)
16. The undertaking of the Bank was expressed to be given in consideration of the appellant dispensing with the provision of a retention fund, and was undoubtedly given for the purposes of cl. 30 (c) of the building contract - it was a "bank guarantee, guarantee bond or other form of security" within the meaning of that clause. It was therefore intended to be "effective as security in lieu of the Retention Fund", i.e., effective as security that Mainline should carry out its obligations under the contract - see cl. 30 (a). Although the liability assumed by the Bank was in form absolute, it was, to the knowledge of the appellant, only undertaken for the purpose of affording security for the performance by Mainline of its obligations; the undertaking was collateral in substance, although not in form. The contract between the appellant and the Bank appears to fall within the description of "guarantee" contained in such authorities as Rowlatt on Principal and Surety, 3rd ed. (1936), p. 4; Jowitt v. Callaghan (1938) 38 SR (NSW) 512, at pp 516-517 and Re Conley (1938) 2 All ER 127, at pp 131, 135 . At the very least the relation between the appellant and the Bank was analogous to that which exists between creditor and surety. It was submitted that in these circumstances the Bank had a right to be subrogated to the remedies of the appellant against Mainline; in other words that upon satisfying the obligations of Mainline it was entitled to resort to any securities given by Mainline to the appellant for the performance of those obligations: A. M. Spicer and Son Pty. Ltd. (In liq.) v. Spicer [1931] HCA 30; (1931) 47 CLR 151, at pp 185-186 . (at p348)
17. In my opinion the doctrine of subrogation does not assist the Bank in the circumstances of the present case. It was said by Lord Eldon that a right of subrogation arises by force of "that equity, upon which it is considered against conscience, that the holder of the securities should use them to the prejudice of the surety; and therefore there is nothing hard in the act of the Court, placing the surety exactly in the situation of the creditor": Aldrich v. Cooper [1803] EngR 540; (1803) 8 Ves Jun 382, at p 389 [1803] EngR 540; (32 ER 402, at p 405) . The principle underlying the doctrine is that it would be inequitable for a creditor, by choosing not to resort to remedies in his power, to cast the whole of the obligation on the surety: see Rowlatt, op. cit., p. 205; Goff & Jones, Law of Restitution (1966), p. 376; Halsbury's Laws of England, 4th ed., vol. 20, par. 194. As the statement of Lord Eldon indicates, and as is well settled, a surety who has paid the debt due to the creditor is entitled to stand in the creditor's shoes; he has the creditor's rights, but only those rights. It may be assumed that the guarantee, although given by the Bank, should be treated as cl. 30 (c) treats it, i.e., as having been provided by Mainline, and that the money paid under the guarantee should be similarly treated. However the appellant has not elected to sekk payment otherwise than by resorting to the security; on the contrary it wishes to pay itself out of the money provided as security. The case is not one in which the security provided by the obligor primarily liable has unconscientiously been exonerated from the discharge of the obligor's liabilities. Moreover the appellant concedes that it has no right to the surplus of the money, once that is determined, and all parties accept this concession as correct. If, therefore, the Bank were placed in the shoes of the appellant, it would have no claim by virtue of subrogation to the surplus of the money, because the appellant itself has no right to that surplus. For these reasons the doctrine of subrogation has no application to a case such as the present. (at p349)
18. On behalf of the Bank reliance was placed on the decision of Bowen C.J.
in Eq. in American Home Assurance Co. v. The London
Assurance and Mainline
Constructions (Vic.) Pty. Ltd. Unreported; 6th September 1974. . In that case
it was held, in circumstances
similar to the present, that any surplus
remaining after the money provided by the plaintiff (whose position in that
case corresponded
to that of the Bank in the present) had been used to
discharge the obligations for which the money was security must be accounted
for by the first defendant ("the building owner") to the plaintiff and not to
the second defendant ("the builder"). The reason for
this conclusion was
expressed as follows:
"To allow the first defendant to retain any surplus not required to cover
those obligations would give it a windfall profit.
It would constitute unjust
enrichment. In my opinion the first defendant is liable to account for the
surplus. It does not contend
otherwise. However, if this surplus is paid to
the second defendant by way of accounting under the contract, then if it were
to be
retained by the second defendant it would equally be a windfall to it,
and would constitute unjust enrichment. Or, if it were paid
to the second
defendant and became part of the common pool of money available to its
unsecured creditors, it would be an unjust enrichment
of that pool and of
those entitled to claim upon it. It is in such circumstances that the law
raises a right in the guarantor or
the person in the position analogous to
that of guarantor to recover direct from the party in the position of the
first defendant,
i.e., the obligee. Whether one speaks of it as being by way
of subrogation or otherwise, it is a right to claim directly against
the
person in the position of the first defendant." (at p349)
19. With all respect, I am unable to accept the assumption that if the
surplus were paid to the builder he would gain a windfall
profit and be
unjustly enriched. If the builder had contracted with the surety, for
consideration, to provide a sum to be dealt with
in accordance with the terms
of the building contract, it could not be said to be an unjust enrichment if,
in accordance with the
terms of that contract, the money was paid to the
builder. Of course the surety would have a right to be indemnified by the
builder
(Rowlatt, op. cit., p. 182; Halsbury's Laws of England, loc. cit.,
par. 213) so that if the builder were solvent no substantial question
would
arise. If the builder were insolvent, as was the case, the question would be
whether the surplus of the money should be applied
in payment, ratably, of the
builder's debts (including that owed to the surety) or should be treated as a
security available to the
surety. Since the surplus could not be a security in
the hands of the building owner, it could not be available to the surety as
a
security, and the creditors could not be said to be unjustly enriched if an
amount due to the builder were made available in payment
of his debts. (at
p350)
20. For the reasons I have given I hold that the Bank has no right, based on subrogation or on any similar equitable doctrine, to be paid the surplus of the money. If the Bank has any right to the surplus, that right must rest on contract. (at p350)
21. There is no evidence as to the terms of any contract between Mainline and the Bank. To succeed the Bank must show that it had a contractual right against the appellant to the return of the surplus. 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. As I have already pointed out, it appears from the guarantee itself that it was given for the purposes of cl. 30 (c) of the building contract. It seems right to conclude that the parties to the guarantee mutually contemplated and agreed that the money when provided by the Bank would be dealt with as the building contract required. (at p350)
22. It then becomes necessary to turn to the building contract, in an
endeavour to discover what it provides on two associated matters
- for what
purposes the money may be used, and to whom any surplus must be paid. The
manner in which a security provided pursuant
to cl. 30 (c) is to be treated is
prescribed by cl. 30 (h). We are of course concerned with "the second
security" within the meaning
of those provisions, and it is provided that it
shall be released in accordance with cl. 31 (j). That clause requires the
release
of the security to the builder within seven days of presentation of
the final certificate, but only if nothing is owed to the proprietor,
or, if
anything is due, when the proprietor has received payment. This clause is not
applicable in the present case, where no final
certificate has been given, but
it does indicate that it was intended that the security - even if a "bank
guarantee" - should be
released to the builder, not to the bank. However in
the present case, where the employment of Mainline has been determined under
cl. 22, the disposition of the security is controlled by the following words
of cl. 30 (h):
"The provisions of this sub-clause are subject to the Proprietor's right
to have recourse to any security provided by the Builder
in the event of any
of the circumstances described in clause 22 of these Conditions arising, or if
the employment of the Builder
is determined thereunder." (at p351)
23. One has "recourse" to a security by resorting to it for the purpose of
gaining some benefit from it, and in the present case
the purposes for which
resort may be had to the security must be found elsewhere in the contract. As
has already been pointed out,
under cl. 30 (c) the security was to be
effective in lieu of the retention fund, and by cl. 30 (a) the retention fund
was "security
that the Builder shall carry out his obligations under this
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 thus provided
for the purpose of satisfying
those obligations of Mainline which Mainline itself had not satisfied. (at
p351)
24. In the events which have happened the obligations of Mainline are its liabilities as declared in cl. 22 (c). By cl. 22 (c) (ii) the appellant was given the right to pay any supplier or sub-contractor for any materials or goods delivered or works executed for the purposes of the contract (whether before or after the date of determination) in so far as the price therefor has not already been paid by the builder. The appellant is not obliged to make any such payment. The power conferred by cl. 22 (c) (ii) is not confined to sub-contracts that have been assigned to the appellant, or to cases in which the payment is necessary to get the work completed; it is conferred "in any case", and thus covers cases where the payment would otherwise be regarded as gratuitous and voluntary. However the words in question cannot be regarded as doing no more than giving the appellant the right to make voluntary payments at its own expense; the appellant could do that without any authority from Mainline. The words carry the necessary implication that the payment is to be made at Mainline's expense; as Hutley J.A. said in the Court of Appeal: "if the payments are made, they discharge liabilities of the builder to the sub-contractor and replace these with liabilities in favour of the proprietor". However the concluding words of cl. 22 (c) (ii), which state that "payments made under this paragraph may be deducted from any sum due or to become due to the Builder", are the sheet-anchor of the Bank, on whose behalf it was submitted that the appellant's right of recovery from Mainline is confined to the method which they permit, so that if no sum is or becomes due to Mainline the payments are irrecoverable. (at p352)
25. The concluding words of cl. 22 (c) (ii) create a real difficulty of construction, and the argument that they were intended to provide the exclusive method by which the appellant should be reimbursed for payments made to sub-contractors is not without force. However the provisions of cl. 22 (c) (iv) in my opinion lead to a different conclusion. That clause provides, inter alia, that "as soon as is reasonable" after the completion of the works, "the Architect shall ascertain the amount of costs properly incurred by the Proprietor . . . and the amount of any direct loss and/or damage caused to the Proprietor by the determination and any other liability of the Builder to the Proprietor under this Contract and shall certify all of the same and if such aforesaid amounts when added to the moneys paid to the Builder before the date of determination result in a total amount in excess of that which would have been otherwise payable under this Contract the difference shall be a debt payable to the Proprietor by the Builder; and if the said amounts when added to the said monies result in a lesser total than that which the Proprietor would otherwise have been required to pay under this Contract, then the difference shall be a debt payable by the Proprietor to the Builder". I have already expressed the view that a payment made by the appellant under cl. 22 (c) (ii) is intended to be made at Mainline's expense, and that the payment creates a liability of Mainline to the appellant. Clause 22 (c) (iv) then provides that the liability is to be brought into the account in favour of the proprietor, so that, if the case requires, the liability will result in a debt being owed by Mainline to the appellant. The provisions of cl. 22 (c) (ii) may be reconciled with those of cl. 22 (c) (iv) by regarding the clauses as providing for different and cumulative remedies, even if, on that view, some words of cl. 22 (c) (ii) are otiose. But if there is a conflict between them, it should be resolved by giving effect to cl. 22 (c) (iv), and thus avoiding the quite irrational result that payments authorized by the contract could only be recovered by the appellant if sums happened to be due by it to Mainline. (at p352)
26. For these reasons the appellant is entitled to have recourse to the money provided under the security for the purpose of ensuring that Mainline carries out its obligations under the contract, including the obligation of discharging any liability created by cl. 22 (c) (ii). The contract does not expressly provide what is to be done with the balance of the money, after all Mainline's obligations have been satisfied. In those circumstances it seems to me that effect must be given to the indication provided by cl. 30 (h) and cl. 31 (j), that the security is to be released to Mainline. In my opinion under the contract it is Mainline that is entitled to any surplus remaining of the money provided under the security once the obligations of Mainline have been discharged. There is nothing at all in the contract that suggests that the security should be released to the Bank, or that the Bank is entitled to have any of the money returned to it. (at p353)
27. I must now deal with the argument advanced by counsel for the Bank in reliance on the decision in Barclays Bank Ltd. v. Quistclose Investments Ltd. [1968] UKHL 4; (1970) AC 567 . That case is authority for the proposition that where money is advanced by A to B, with the mutual intention that it should not become part of the assets of B, but should be used exclusively for a specific purpose, there will be implied (at least in the absence of an indication of a contrary intention) a stipulation that if the purpose fails the money will be repaid, and the arrangement will give rise to a relationship of a fiduciary character, or trust. In the present case it was submitted not that a trust was created, but that there was a contract express or implied between the appellant and the Bank that so much of the money as was not spent in the discharge of the obligations of Mainline would be refunded to the Bank. However there was no evidence from which it can be concluded that it was intended that the money should not form part of the general assets of Mainline. There was no requirement that it should be kept in a separate fund; in this report the provisions under which the security was given - those of cl. 30 (c) - may be contrasted with those of cl. 30 (d) which require the retention fund to be paid to an interest bearing deposit in joint names, the amount of which was to be held on trust. Further, the obligations of Mainline under the contract were various, and the likely amount of Mainline's final liability to the appellant was quite unknown when the guarantee was given. The payment by the Bank was not a provisional payment, or a payment on account; the money was provided as a security and was used for that purpose. In all these circumstances it should be concluded that the intention of the parties to the guarantee was that the money was to form part of the general assets of the appellant, to be used as it wished, subject only to an obligation to account (to Mainline) for any surplus. No stipulation to repay the money to the Bank can be implied. (at p353)
28. I would express my conclusions as follows: (a) The appellant had the right to resort to the money provided by the Bank to satisfy the obligations owed to the appellant by Mainline, including the obligation to reimburse the appellant for any amount paid to sub-contractors; (b) this right existed whether or not the surplus of the money was "a sum due or to become due" to Mainline within cl. 22 (c) (ii); (c) if it matters, the Bank had no right, equitable or contractual, to the surplus of the money, which was accordingly "a sum due or to become due" to Mainline. (at p354)
29. There remains however a question first raised by Hutley J.A. in the Court of Appeal. As Hutley J.A. rightly pointed out, the liability of Mainline to the appellant arose only on payment of the sub-contractors, and payment has not yet been made. Further, he held, cl. 22 (c) (ii) was intended to operate only for a short time after the termination of the contract, and the permissible time for payment expired on 30th January 1975, when the architect gave what the learned Judge of Appeal described as a "certificate". (at p354)
30. There is no doubt that upon the proper construction of cl. 22 (c) (ii) and (iv) a payment by the appellant to any sub-contractor must be made within a reasonable time after the completion of the works, and the certificate of the architect was also required to be made as soon as was reasonable after completion. What is a reasonable time is a question of fact. It may safely be concluded that these questions were not considered at first instance - there is no mention of them in the judgment of Bowen C.J. in Eq., or in the notice of appeal to the Court of Appeal, and Hutley J.A. records that they were not adverted to in oral argument. Thus the question whether the three documents dated 30th January 1975 amounted to a certificate within cl. 22 (c) (iv) was never explored; they are not so described in evidence or on their face. If in conjunction they did constitute a certificate, they certified as to the amount payable to the sub-contractors, although that amount had not been paid. Similarly the question whether a reasonable time for payment had expired was never examined. The money was received by the appellant on 13th January 1975. It appears that the amounts payable to the sub-contractors were known before that date. The first letter seeking the concurrence of the liquidators to the payment, and advising that an application would be made to the Court if they did not concur, was written on 14th April 1975. In the circumstances it was reasonable for the appellant to seek the concurrence of the other parties, or of the Court, before making these substantial payments, and if a reasonable time had not elapsed on 14th April 1975 the lapse of time thereafter could hardly be relied on by those parties who asserted that it was too late to make the payments. There is no evidence as to what, if anything, was done between 13th January and 14th April 1975. These questions were such that relevant evidence might have been given in relation to them had they been raised at the trial, and conformably with settled principle it would not be right for an appellate court to make its own findings upon them adversely to the appellant. The ground on which Hutley J.A. determined the appeal should not in my opinion be supported. (at p355)
31. 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 sub-contractors in the circumstances permitted by cl. 22 (c) (ii), and that the appellant is now entitled to use it in making payment to the sub-contractors. The declaration made by Bowen C.J. in Eq. in favour of the appellant was in my opinion correct. (at p355)
32. It follows from what I have said that under the guarantee and the building contract the surplus of the money was payable to Mainline and not to the Bank. However at no stage of the proceedings did Mainline challenge the contention of the Bank that it was entitled to the surplus. There was no appeal against the order of Bowen C.J. in Eq. that the balance of the fund less costs be paid to the Bank. In these circumstances it seems proper not to interfere with that order. (at p355)
33. I would overrule the objection to competency, allow the appeal, and restore the declaration and order of the learned primary judge. (at p355)
STEPHEN J. Under this building contract the builder, now in liquidation, was, as is customary, under no obligation to the proprietor to pay sub-contractors what was due to them: nor, of course, was the proprietor itself under any liability to unpaid sub-contractors. Soon after the appointment of a receiver of the builder's undertaking, at a time when the building work was nearing completion, the proprietor determined the builder's employment and itself arranged for the completion of the work. (at p355)
2. Sub-contractors were found to be owed some $116,000 by the builder for work done before termination of the builder's employment. The proprietor wished to see these sub-contractors paid. Were it to pay them it could, under cl. 22 (c) (ii) of the contract, deduct the amounts it paid them for any sums due or to become due to the builder; but nothing in hand answered that description, partly because the proprietor held no retention fund, built up out of deductions from progress payments due to the builder. The builder had instead, with the proprietor's consent, furnished a bank guarantee as "security in lieu of the retention fund", a course open to it under the contract. (at p356)
3. In the circumstances the proprietor called on the Bank under the guarantee. The Bank complied, paying to it what I shall call the guarantee fund, that is, the full amount of $126,140 payable under the terms of the bank guarantee. Amounts already paid to the builder plus the cost to the proprietor of completing the building work proved to exceed the adjusted contract price by only some $388 and the proprietor proposed, out of the balance of the guarantee fund, $125,752, to pay $116,259 to sub-contractors in satisfaction of amounts owed to them by the builder. (at p356)
4. The question on this appeal is whether the proprietor may, to the extent of payments which it may voluntarily make to the builder's sub-contractors, thereafter reimburse itself from the balance of the guarantee fund. (at p356)
5. If it may, it will follow that this standard form of building contract permits a proprietor to pay a second time, this time to sub-contractors, for work for which it has already paid the builder, thereby gratuitously benefiting sub-contractors at the expense of the guarantor. He the bank guarantee been procured for the benefit of sub-contractors, the better to assure them of payment for work done by them, all this would make commercial common sense. However, being procured by the builder as security against the consequence to the proprietor of default by the builder in its obligations under the building contract, obligations which do not extend to payment of its sub-contractors, this suggested effect of the contract less readily accords with what might be thought to be commercial expectations. (at p356)
6. Examination of the contract satisfies me that it does not, in fact, produce any such result. That it should be thought to do so arises from wrongly regarding the security furnished by the Bank as in all respects analogous to the retention fund which it replaces. However, unlike the retention fund, it does not represent moneys to which the builder is or ever will become beneficially entitled: it forms no part of the contract price, held back for the time being by the proprietor until the builder has performed its obligations under the contract. This is a critical distinction, both in terms of the contract and also having regard to the practical working out of the relationships between proprietor, builder and guarantor: it might seem appropriate enough that a proprietor, discovering that its builder has retained moneys which it should have passed on to sub-contractors, should, instead of paying further moneys to the builder, seek to rectify the position it has discovered by diverting to those sub-contractors money otherwise due to the builder, thereby avoiding overpayment of the builder and underpayment of the sub-contractors. But the appeal which the simple justice of this course possesses depends entirely upon the money which the proprietor uses to pay the underpaid sub-contractors being money which would otherwise go to the builder, as would a retention fund. It is absent in the case of a guarantee fund provided by a third party, the guarantor, and which is comprised of moneys to which the builder will never be entitled and to which the proprietor has only such limited rights of recourse as will serve to safeguard it from loss due to the builder's default. (at p357)
7. That what I have just described is indeed the true character of this guarantee fund appears from the terms of the contract. The so-called bank guarantee happens to be no more than an unconditional undertaking by the Bank to pay to the proprietor on demand up to the maximum sum of $126,140: however it appears on its face to have been given at the builder's request in consideration of the proprietor dispensing with the retention fund under the building contract and is to be understood in light of those terms of the contract which describe its function. The first of these is cl. 30 (c), in which the bank guarantee or other security which the builder may provide is described as being "effective as security in lieu of the Retention Fund". This use of the term "security" is explained by par. (a) of cl. 30, read in conjunction with pars. (d), (f), (g) and (h) of that clause. In cl. 30 (a) the retention fund itself is described as being retained by the proprietor "as security that the Builder shall carry out his obligations under this Contract" and when cl. 30 (c) refers to a bank guarantee as being "effective as security", it is as security that the builder's contractual obligations are carried out that it is to be effective. Later paragraphs of cl. 30, which (together with others relating to payment over of half the retention fund to the builder, or reduction of the substituted bank guarantee to one half of its original amount, upon practical completion of the building, to which paragraphs, for brevity, I do not further refer) are set out in other judgments, show the nature of the benefit to the proprietor of having a retention fund. If amounting to more than $4,000 it is held in trust for him: cl. 30 (d); if less than $4,000, although held in trust for the builder, it is available to the proprietor as a source for payment of amounts which he becomes entitled to deduct from sums due or to become due to the builder: cl. 30 (g). In either event it is to be taken into account - cl. 30 (f) - in determining the amount of the final certificate showing the balance finally payable by the proprietor to the builder: cl. 31 (e). However it never becomes available to the proprietor in simple diminution of the adjusted contract sum payable for the doing of the building work. It always remains a part of the price to be paid to the builder, although available for recourse by the proprietor if some deduction from the builder's full entitlement is warranted. (at p358)
8. When a security in the form of a bank guarantee is furnished by the builder in substitution for a retention fund it serves this same purpose: cl. 30 (h) preserves the proprietor's right to have recourse to it if the builder's employment is determined under cl. 22 or if any of the circumstances which that clause describes arise. If the final certificate certifies a balance in the proprietor's favour - cl. 31 (e) - release of the security will be contingent upon the proprietor being paid that balance - cl. 31 (j) - and in arriving at that balance any cost to the proprietor of completing the works, any direct loss or damage caused to it by the determination and any other liability of the builder to the proprietor will all be debited against the builder: cl. 22 (c) (iv). (at p358)
9. What such a security, or the fund representing it, never does, and of its nature never can do, is to serve that other function of the retention fund, that of constituting a "sum due or to become due to the builder" under cl. 22 (c) (ii) so as to be available as a source of reimbursement should the proprietor decide to pay sub-contractors whom the builder has left unpaid. (at p358)
10. Two interrelated points of construction concerning cl. 22 (c) (ii) and cl. 22 (c) (iv) are involved in the foregoing. Clause 22 (c) (ii), in permitting the proprietor to pay unpaid sub-contractors, gives it, in my view, no consequential right as against the builder except that expressly conferred by that same paragraph, namely, a right to deduct from any sum due or to become due by it to the builder. Payment of unpaid sub-contractors does not result in a liability arising on the part of the builder to the proprietor so as to be an item of "other liability of the builder to the Proprietor under this Contract" for the purposes of cl. 22 (c) (iv). The relevance of this is that such a payment by the proprietor will not lead to the amount of that payment being debited against the builder in computing the certified final balance and will, therefore, not be a component of any amount which the proprietor, by cl. 31 (j), is entitled to demand before release of security held by him. (at p358)
11. When cl. 22 (c) (ii) permits the proprietor to pay unpaid sub-contractors and make a corresponding deduction from any sum due or to become due to the builder it confers upon the proprietor a unique entitlement to have immediate recourse to the retention fund, whether more or less than $4,000. But for this right of deduction, the proprietor would have no right of immediate recourse either to the interest-bearing joint deposit provided for by cl. 30 (d) or to any amount held on trust for the builder under cl. 30 (g). It is thus this express right to deduct conferred by cl. 22 (c) (ii) that alone provides any incentive to a proprietor, upon determination of the builder's employment, to pay unpaid sub-contractors. Upon such a determination the proprietor becomes no longer bound to make any further payment to the builder until completion of the works - cl. 22 (c) (iv) - so that a right to deduct from moneys due to the builder, such as unpaid progress payments, is of no particular value to it since it retains these in any event until completion. Without the express right, conferred by cl. 22 (c) (ii), to appropriate to itself moneys in the retention fund, not otherwise available to it, it would, until the final certificate issued, perhaps years later, remain out of pocket to the extent of sums paid by it to sub-contractors which, it is to be recalled, it would have earlier already paid to the builder but which the builder had failed to pass on to sub-contractors. So regarded, its ability to pay sub-contractors is necessarily intimately associated with the power to deduct to which it is linked in cl. 22 (c) (ii). Only if there are amounts available in a retention fund can it recoup itself for payments to sub-contractors and only if there are such amounts, offering prospects of immediate recoupment, will there be any inducement to it to pay unpaid sub-contractors. (at p359)
12. The reference in cl. 22 (c) (iv) to "any other liability of the Builder to the Proprietor under this contract" is not, according to its ordinary meaning, apt to include an amount paid by the proprietor under cl. 22 (c) (ii) but not deducted as that paragraph contemplates. The payment of such an amount does not create any liability on the part of the builder to the proprietor, it is neither paid at its request nor on its behalf. This is made clear by the terms of cl. 22 (c) (ii) which does not differentiate, in the case of such payments, between those for work done by sub-contractors before or after, perhaps long after, the date of determination: they are all treated in the same way and, just as the latter are not liabilities of the builder to the proprietor under the contract, as that phrase is used in cl. 22 (c) (iv), but are instead part of the "costs properly incurred" in completing the work to which that clause refers and will be debited against the builder in that guise in arriving at the certified final balance, no more are the former. (at p359)
13. One further aspect of the contract calls for mention. Clause 31 (j) contemplates the eventual release to the builder of a security provided in lieu of retention fund, as does cl. 30 (h). It was sought to say that these provisions for release of security to the builder might affect the right of the bank to the return of the balance of the guarantee fund remaining after satisfying the proprietor's claim to $388. In my view it has no such effect in the present case. The contract left it open to the parties to fix upon "any form of security acceptable to the Proprietor" as a substitute for the retention fund: cl. 30 (c), and had they determined upon a type of security which did not involve a third party, the Bank, this provision for release, like much else in this case, might have borne a different complexion. However, in the outcome something in the nature of a guarantee by a third party was agreed upon as the security and the terms of the so-called bank guarantee, read in the light of the provisions of the contract, plainly put the Bank in the position of guarantor. The proprietor having availed itself of the guarantee fund to the extent of $388, the balance of the guarantee fund, now unnecessary for the purposes for which it was furnished, must be returned from whence it came, neither the proprietor nor the builder having any claim to it. Although the whole of the guarantee fund had, pursuant to the terms of the bank guarantee, to be paid over by the Bank to the proprietor when demanded, once it had served its purpose, as it did by providing a source of the $388 due to the proprietor, only the Bank can be entitled to the balance. Whether its remedy would, despite the contract's references to release to the builder, lie in an action against the proprietor for an account or for breach of an implied term of the contract of guarantee, or for relief as an incident of its character of surety or would involve both the proprietor and the builder, the former being obliged to pay over the latter, which would hold what it received on trust for the Bank, does not matter: in no event can that balance be treated by the proprietor as other than a fund to which the Bank is solely entitled. So regarded, references to the release of the security to the builder are of no practical significance. (at p360)
14. For the foregoing reasons I conclude that the Bank is entitled to the whole of the balance of what I have called the guarantee fund after deduction therefrom of the sum of $388 and that, in consequence, should the proprietor pay unpaid sub-contractors it will not be entitled to reimburse itself by recourse to that fund. (at p360)
15. I would accordingly dismiss this appeal. (at p360)
JACOBS J. I agree with the conclusion of Gibbs A.C.J. and with the reasons which he has given for that conclusion. (at p361)
MURPHY J. I agree with Gibbs A.C.J.'s conclusions. The appeal should be allowed. (at p361)
AICKIN J. The appellant, Australasian Conference Association Ltd. ("the proprietor"), which was the plaintiff below, entered into a building contract dated 30th April 1971 with Mainline Constructions Pty. Ltd. ("the builder") for the construction of major extensions and alterations to the Sydney Sanitarium and Hospital at Wahroonga for the sum of $5,045,658.00. In the course of the works certain variations were agreed to which had the effect of making the contract price $6,303,805.44 ("the adjusted contract price"). The work was almost completed when on 20th August 1974 the Australia and New Zealand Banking Group Ltd. ("the Bank") appointed one Jamison ("the receiver") as a receiver and manager of the builder pursuant to the terms of a charge held by the Bank. It was agreed between the proprietor and the receiver that the work should continue and that the proprietor would pay to the receiver an amount to cover the wages of on-site employees of the builder. The work continued for a short period in respect of which the proprietor paid the receiver the sum of $2,880.90 pursuant to the arrangement. On 11th September 1974 the proprietor terminated the employment of the builder by a written notice given pursuant to cl. 22 (b) of the building contract. Under that clause the proprietor had the right to determine the employment of the builder under the contract on the appointment of a receiver, amongst other events, and it was not in dispute that the notice so given did terminate the employment of the builder. On 16th December 1974 an order for the winding up of the builder was made by the Supreme Court of New South Wales. (at p361)
2. It is convenient to set out here the terms of cl. 22 of the building
contract:
"(a) If the Builder shall make default in any one or more of the
following respects, that is to say:
(i) if he, without reasonable cause, wholly suspends the carrying out of
the Works before practical completion thereof, or
(ii) if he fails to proceed with the Works with reasonable diligence or in
a competent manner, or
(iii) if he refuses or persistently neglects to comply with written notice
from the Architect requiring him to remove defective
work or improper
materials or goods and by such refusal or neglect the Works are materially
affected,
then in any such case the Architect may send to him by certified mail, a
written notice specifying the default and stating the
intention of the
Proprietor to determine the employment of the Builder and if the Builder fails
to remedy such default in a bona
fide manner within 14 days after receipt of
such notice, then the Proprietor without prejudice to any other rights or
remedies may
within 14 days after such continuance of default on the part of
the Builder, by written notice delivered by certified mail to the
Builder,
forthwith determine the employment of the Builder under this Contract provided
that such notice shall not be given unreasonably
or vexatiously. If the
Proprietor is at the time of such notice himself in breach of this Contract,
then the said notice of determination
of the employment of the Builder shall
be deemed to be void and of no effect.
(b) In the event of the Builder having an execution levied against him or
becoming bankrupt or entering or attempting to enter
into any composition or
arrangement with his creditors or being a company having an execution levied
against it or a winding up order
made or (except for the purposes of
reconstruction) passing or attempting to pass a Resolution for winding up or
being a party to
the appointment of or having an Official Manager appointed or
on the appointment of a Receiver of the whole or any part of its property
or
undertaking or being a party to or attempting to enter into any composition or
Scheme of Arrangement then the Proprietor may forthwith
without prejudice to
any other rights or remedies by written notice delivered by certified mail to
the Builder determine the employment
of the Builder under this Contract.
(c) In the event of the employment of the Builder being determined
pursuant to this clause the following shall be the respective
rights and
liabilities of the Proprietor and the Builder:
(i) The Proprietor may employ and pay other persons to carry out and
complete the Works and the Proprietor or any such aforesaid
persons may enter
upon the Works and use all temporary buildings, plant, tools, equipment, goods
and materials intended for, delivered
to and placed on or adjacent to the
Works and may purchase all materials and goods necessary for the carrying out
and completion
of the Works in accordance with this Contract.
(ii) The Builder shall if so required by the Proprietor or Architect
within 14 days of the date of determination assign to the
Proprietor without
payment the benefit of any agreement for the supply of materials or goods
and/or for the execution of any work
for the purposes of this Contract but on
the terms that a supplier or sub-contractor shall be entitled to make any
reasonable objection
to any further assignment thereof by the Proprietor. In
any case the Proprietor may pay any supplier or sub-contractor for any
materials
or goods delivered or works executed for the purposes of this
Contract (whether before or after the date of determination) in so
far as the
price therefor has not already been paid by the Builder. The Proprietor's
rights under this paragraph are in addition
to his rights to pay nominated
sub-contractors as provided in these Conditions and payments made under this
paragraph may be deducted
from any sum due or to become due to the Builder.
(iii) The Builder shall as and when required in writing by the Architect
so to do (and not before) remove from the Works any
temporary buildings,
plant, tools, equipment, materials, and goods. If within a reasonable time
after receipt of such request the
Builder does not comply therewith, then the
Proprietor may, not less than 14 days after notifying the Builder in writing
of his intention
(but without being responsible for any loss or damage) remove
and/or sell any such property of the Builder holding the proceeds less
all
reasonable costs incurred to the credit of the Builder.
(iv) Until completion of the Works pursuant to paragraph (i) of this
sub-clause, the Proprietor shall not be bound by any provision
of this
Contract to make any further payment to the Builder but as soon as is
reasonable thereafter, having regard to the rights
of the Proprietor under the
said paragraph, the Architect shall ascertain the amount of costs properly
incurred by the Proprietor
pursuant to the said paragraph and the amount of
any direct loss and/or damage caused to the Proprietor by the determination
and
any other liability of the Builder to the Proprietor under this Contract
and shall certify all of the same and if such aforesaid
amounts when added to
the moneys paid to the Builder before the date of determination result in a
total amount in excess of that
which would have been otherwise payable under
this Contract the difference shall be a debt payable to the Proprietor by the
Builder;
and if the said amounts when added to the said moneys result in a
lesser total than that which the Proprietor would otherwise have
been required
to pay under this Contract, then the difference shall be a debt payable by the
Proprietor to the Builder.
(v) The Builder and/or any person authorised by him and approved by the
Architect shall be granted access to the Works at all
reasonable times for the
purpose of inspecting, surveying or measuring the same." (at p363)
3. By the date of the termination of the builder's employment as builder the
proprietor had paid to the builder pursuant to architects'
certificates the
sum of $6,101,646.00. After the termination of the employment of the builder,
work was completed by the proprietor
in association with the architects by
engaging former employees of the builder and sub-contractors formerly engaged
by the builder.
In fact the work was completed in or about December 1974. The
cost of such completion, together with payments previously made by
the
proprietor to the builder pursuant to architects' certificates, exceeded the
adjusted contract price by $388.24. The documents
prepared by the architects
showing this sum are set out later in this judgment. (at p364)
4. Clause 30 of the contract provides for a retention fund and alternatively
for security, the material paragraph being as follows:
"(a) An amount referred to in these Conditions as the Retention Fund shall
be retained by the Proprietor in accordance with sub-clause
(b) of this clause
as security that the Builder shall carry out his obligations under this
Contract.
(b) The amounts certified by the Architect for payment by the Proprietor
to the Builder pursuant to clause 28 of these Conditions
shall be exclusive of
the retainable percentage as stated in the Appendix to these Conditions of the
Architect's estimate of the
contract value of the work executed provided that
when the total amount thereby retained reaches the amount stated in the said
Appendix
as the Limit of Retention Fund (which shall not exceed five per
centum of the Contract Sum) or that amount as reduced pursuant to
any
provision of this Contract or any agreement, no further amounts may be
retained by the Proprietor by virtue of this sub-clause.
(c) Should the Proprietor so agree, the Builder may provide a bank
guarantee, guarantee bond or other form of security acceptable
to the
Proprietor equivalent (unless otherwise agreed) to the amount stated in the
Appendix to these Conditions as Limit of Retention
Fund and in such event same
shall be effective as security in lieu of the Retention Fund referred to in
sub-clause (a) of this clause
and the provisions of sub-clause (b) of this
clause shall not apply.
(d) Where the Limit of Retention Fund as stated in the Appendix to these
Conditions is $4,000 or greater, the amounts which the
Proprietor is entitled
to retain progressively pursuant to sub-clause (b) of this clause shall,
unless otherwise agreed, be paid
by him to the credit of an interest bearing
deposit in the joint names of the Proprietor and the Builder at a Bank
nominated by the
Builder and approved by the Proprietor. Such payments to such
joint deposit shall be made by the Proprietor within 7 days of the
presentation to him by the Builder of any progress Certificate issued pursuant
to clause 28 of these Conditions to which the provisions
of sub-clause (b) of
this clause have been applied and evidence of each such payment shall be
provided to the Builder by the Proprietor
within a further 7 days. The amount
to be held in the aforesaid joint deposit shall be upon trust for the
Proprietor subject to the
provisions of sub-clauses (e) and (f) of this clause
except that in the event of the Builder determining his employment pursuant
to
clause 23 of these Conditions, the rights and interests of the Proprietor in
respect of such amount shall be and are hereby transferred
to the benefit of
the Builder.
. . .pursuant to sub-clause (c) of this clause thus rendering the Retention Fund provisions of this clause not applicable such security shall be maintained effective until the issue by the Architect of the Notice of Practical Completion pursuant to clause 25 of these Conditions or until the date the Works are deemed to be practically completed pursuant to that clause and thereafter, upon the Builder providing a further security equal to one half of the first-provided security, such first-provided security shall be released. The second security shall be released in accordance with sub-clause (j) of clause 31 of these Conditions. The provisions of this sub-clause are subject to the Proprietor's right to have recourse to any security provided by the Builder in the event of any of the circumstances described in clause 22 of these Conditions arising, or if the employment of the Builder is determined thereunder. If any of the circumstances described in clause 23 of these Conditions arise, and if the Builder determines his employment pursuant to that clause, the Proprietor shall release his interest in any such security immediately upon written notice from the Builder to do so."
(h) Where the Builder with the Proprietor's agreement provides a security
". . .copy thereof to the Proprietor and a statement to the Builder showing the difference (if any) between the amount of the claim submitted by the Builder pursuant to sub-clause (a) of this clause and the amount of the Final Certificate within 14 days of the last to occur of the following:
(b) The Architect shall issue a Final Certificate to the Builder and a
(i) The end of the Defects Liability Period.these Conditions.
(ii) The completion of the making good of defects pursuant to clause 26 of
. . .shall state:
(e) The Final Certificate referred to in sub-clause (b) of this clause
. . .purposes of this Contract then within 7 days of the presentation of the Final Certificate
(j) If the Builder has provided security to the Proprietor for the
5. The amount stated in the appendix to the building contract as the amount
of the retention fund was $252,280.00. However the proprietor
agreed with the
builder pursuant to cl. 30 (c) for a "bank guarantee" to be given in lieu of
the retention fund and that guarantee
was given by the Bank on 2nd February
1973 in the following form ("the bank guarantee"):
"1. At the request of Mainline Constructions Pty. Ltd. (hereinafter
called the Contractor) and in consideration of Australasian
Conference
Association Limited (hereinafter called the Association) dispensing with the
provision of a retention fund to be held
against the Contractor referred to in
the contract for construction of a building for the Australasian Conference
Association Limited
entered into by the Contractor with the Association,
Australia and New Zealand Banking Group Limited (hereinafter called the Bank)
unconditionally undertakes to pay on demand any sum which may from time to
time be demanded by the Association to a maximum aggregate
sum of One hundred
and twenty six thousand one hundred and forty dollars ($126,140).
2. This undertaking is to continue until a notification has been received
from the Association either that such deposit is no
longer required by the
Association until payment to the Association by the Bank of the whole of the
said sum.
3. Should the Association notify the Bank that payment is desired of the
whole or any part or parts of the said sum, such payment
will be made to the
Association without further reference to the Contractor and notwithstanding
any notice given by the Contractor
to the Bank not to pay same.
4. Provided always that the Bank may at any time without being required so
to do deposit with the Association the sum of One
hundred and twenty six
thousand one hundred and forty dollars ($126,140) or such lesser sum that may
be required by the Association
and thereupon the liability of the Bank shall
cease and determine." (at p367)
6. When the works were deemed to be practically completed the first security
was released and the Bank provided a second security,
dated 2nd February 1973,
for one half of the amount, namely, $126,140.00 and that is the Bank guarantee
set out above. The precise
date of "practical completion" does not appear, but
it must have been on or shortly prior to 2nd February 1973. The defects
liability
period referred to in cll. 25 (g) and 26 was stated in the Schedule
to be fifty-two weeks, and must have expired not later than 2nd
February 1974.
Nothing appears to turn on the fact that the work was still uncompleted in
August 1974, but presumably extensions
had been granted. (at p368)
7. Clause 31 (j) provides for the release of the second security, but that release is subject to the proprietor's right to have recourse to the security provided by the builder in the event of any of the circumstances described in cl. 22 arising or if the employment of the builder is determined thereunder. It further provides that if the builder has provided security then within seven days of the final certificate, if the final balance is nil or shows an amount due by the proprietor to the builder, the proprietor shall secure the release of the security to the builder, and if the final balance shows an amount due by the builder to the proprietor, the latter, upon receiving payment of the amount due by the builder, shall do all things necessary to secure release of the security to the builder. These provisions are, however, subject to cl. 22. (at p368)
8. After the completion of the contract works by the proprietor, but before
the accounting under cl. 22 (c) (iv) by the architects,
the proprietor on 7th
January 1975 wrote to the Bank as follows:
"In lieu of the retention monies under a building contract for building
of the Sydney Sanitarium and Hospital by Mainline Construction
Pty. Ltd. the
hospital's proprietors, Australasian Conference Association Ltd., hold a bank
guarantee (No. 13372) by your bank for
an amount of $126,140.00. To enable the
hospital to make payments to subcontractors for the completion of the works it
is necessary
to request the bank to pay the amount of the guarantee to the
Australasian Conference Association Ltd.
Please accept this letter as a demand under the terms of the guarantee
for such payment."
The Bank replied on 13th January 1975 as follows:
"Pursuant to your demand dated 7th January 1975 made under the
abovementioned guarantee our bank cheque for $126,140.00 is
enclosed.
It is pointed out, however, that the guarantee is in lieu of the
deduction of retention moneys under the relevant contract
and consequently the
rights of the Bank as secured creditor of the contractor and of the
Receiver/Manager of the contractor are reserved
for the recovery from you of
any difference between the amount paid to you and the total amount which would
have been deducted by
way of retention moneys under the contract up to its
termination had the guarantee not been given.
Since this determines the amount of the Bank's liability would you
kindly return the original guarantee to this office." (at
p368)
9. The sum of $126,140.00 was, however, not expended by the proprietor, but
was held in an interest-bearing account. In August 1975
proceedings were
instituted in the Equity Division by the proprietor as plaintiff and the
builder and the receiver as defendants
seeking a declaration that the
proprietor was entitled to pay, out of the fund held by it, certain
sub-contractors engaged by the
builder who had done work prior to the
termination of the builder's employment. It was held by Bowen C.J. in Eq. that
it was so entitled.
On appeal to the Court of Appeal by the receiver the Bank
was, by direction, added as an appellant and the Bank's guarantee was put
in
evidence. The builder, though a respondent to the appeal, took no part in the
proceedings. It was held by a majority of the Court
of Appeal that the
proprietor was not entitled to use the fund in the manner which it desired and
that, save for the amount of $388.24
which was not in dispute, the whole of
the fund should be paid to the Bank. (at p369)
10. It is clear on the facts that the proprietor had not promised the sub-contractors to make those payments to them in consideration of their agreement to continue to work on the project. There is no basis for suggesting that the proprietor undertook to pay the amounts under duress or in mitigation of damages or became in any way bound to pay them. The payments would, if made, be voluntary payments. Clause 15 of the contract deals with payments to nominated sub-contractors, but it is common ground that these sub-contractors were not nominated sub-contractors. (at p369)
11. Clause 30 (c) provides that the guarantee "shall be effective as security in lieu of the Retention Fund" and under cl. 30 (a) the retention fund is to be "security that the Builder shall carry out his obligations under this Contract". A "bank guarantee, guarantee bond, or other form of security", though it is in lieu of the retention fund, does not have the same character, nor does it stand in exactly the same position. The first, and perhaps the most obvious difference, is that the retention fund forms part of the contract price, though withheld until appropriate architects' certificates are issued. Except in cases of a fund of less than $4,000.00, it is to be paid to the credit of an interest-bearing bank account in the joint names of the builder and the proprietor on trust for the proprietor. Any amount coming from a guarantee or other security is not part of the contract price, but is over and above the contract price. It is provided by the builder in the sense that he must provide or procure the security or procure the guarantee. (at p369)
12. Another important difference in the case of this "bank guarantee" is that the whole amount may be called up on demand, perhaps at any time, but at least when an event within cl. 22 (c) (ii) has occurred, or on the narrowest view, when the employment of the builder has been terminated, and it then comes into the hands of the proprietor. In the case of the retention fund, however, it would (if amounting to $4,000.00 or more) remain in the joint account until the final certificate from the architects was issued and, if the builder's employment is terminated, would presumably be taken into account by the architects under cl. 22 (iv), though it is not expressly so stated. What use the proprietor may make of the proceeds of calling up a guarantee or otherwise enforcing a security is a different question. It is common ground that such moneys would not be the subject of any trust, the question being the manner in which and the extent to which the proprietor must account for it. (at p370)
13. The bank guarantee is a somewhat curious instrument, though we were told that the form was not uncommon. Though headed "Bank Guarantee" it is not in form a guarantee, and its only operative provision is an unconditional undertaking to pay a sum of money on demand by the proprietor. In that respect it resembles, and perhaps is, a "promissory note" (see s. 90 of the Bills of Exchange Act 1909-1973 (Cth)), but even if that were its true character, it would still be an "other form of security" within the meaning of cl. 30 (c). (at p370)
14. However, the bank guarantee is not to be read alone, for it makes an express cross-reference to an identifiable building contract, to "the request of" the builder and to it being given "in consideration of" the proprietor "dispensing with the provision of a retention fund". It does not appear for present purposes to matter whether that cross-reference is sufficient to modify the apparently unconditional obligation to pay on demand or limit the occasions on which demand might be made, because the demand was made and the money paid without any relevant objection. (at p370)
15. It is common ground that upon the employment of the builder being determined the proprietor was entitled either by the terms of the bank guarantee alone, or in conjunction with cl. 30 (h), to "have recourse to" or call up the amount. The question is for what purpose and to what extent could it be used by the proprietor. (at p370)
16. It was argued for the Bank that the only purposes to which the guarantee moneys could be put were the completion of the works, or otherwise to make good any failure by the builder to carry out its obligations under the contract, and that the use which the proprietor proposed did not fall within either of those categories, nor would such payments fall within cl. 22 (c) (iv) as "costs properly incurred", "direct loss and/or damage" or any "other liability" of the builder to the proprietor. (at p371)
17. It was contended for the proprietor that cl. 30 (h), in giving to it a "right to have recourse to any security", enabled it to use the moneys for any purpose at all, or simply to retain them for its own use and benefit, to apply them in payment of the sub-contractors. It does not seem to me that the building contract contemplates that the proprietor is entitled to these moneys beneficially in the sense that it may devote them to any purpose of its own without accounting therefor, and indeed, in the end this argument was not pressed. It was not contended that calling up the security could operate so as to reduce the price which the proprietor was bound to pay for the completed works. That is certainly not possible in the case of the retention fund properly so called and I can see nothing in the relevant clauses of the building contract which would support an inference that they may operate so as to confer such a benefit on the proprietor, for the bank guarantee and moneys paid under it are "security" only. (at p371)
18. On 30th January 1975 the architects issued a "Contract Statement" in the
following form:
"Contract Sum $5,045,658.00On the same date the architects issued a document entitled "Statement of Expenditure of Available Funds After Date of Appointment of Receiver and Manager Mainline Constructions Pty. Ltd." as follows:
Less Contingency Sum $ 160,000.00
_______________
$4,885,658.00
plus: Contingency Adjustments $ 184,484.59
plus: Client Authorised Adjustments $ 308,556.45
plus: Rise and Fall Adjustments $ 709,850.18
plus: Worker's Compensation $ 21,460.12
plus: South Wing Alterations $ 205,830.00
plus: Builder's Commission on
Provisional Sum Extras $ 15,630.95
less: Provisional Quantity
Adjustments $ 2,597.14
less: Provisional Sum
Adjustments $25,067.71
__________ ______________
$27,664.85 $6,331,470.29
$ 27,664.85
______________
ADJUSTED CONTRACT SUM $6,303,805.44
CERTIFICATES ISSUED UP
TO 11.9.1974 (CONTRACT
DETERMINED) $6,101,646.00
BALANCE AVAILABLE FOR
______________
'COSTS TO COMPLETE' $ 202,159.44"
______________
"Balance from Contract Statement at 11.9.7491,594.73
(Contract Determined) $202,159.44
DEDUCTIONS
1. Payments made to Nominated Sub-Contractors directly by Architect. $
2. Certificates for work required to complete
project authorised by Architect Orders. $ 75,757.37
3. Payment of Wages to Ex-Mainline
employees retained by Hospital to carry
out and control work on site, hiring
charges and sundry minor items and
materials bought by Hospital in connection
with same. $ 20,834.55
4. Payments made by A.C.A. to Receiver
Manager as per Receiver's Statement
14.10.1974. $ 2,880.90
5. Architect's cost in connection with
Administration of Costs to Complete. $ 9,104.13
6. A.C.A. costs in connection with Staff
employed "on-cost" to complete. $ 1,500.00
7. Hospital employees wages employed on
work to complete. $ 876.00
___________
$202,547.68
$202,159.44
___________
OVEREXPENDITURE $ 388.24"
____________
(at p372)
19. The argument for the Bank was based on the terms of the building
contract, unconnected with the fact that its receiver would
presumably be
entitled to receive anything which became due to the builder. (at p372)
20. The critical question is whether the moneys paid under the bank guarantee can be regarded as an amount "due or to become due to the Builder" within the meaning of cl. 22 (c) (ii). Clause 22 (c) (iv) deals with ultimate accounting where the employment has been terminated and under it the architects are to ascertain "the amount of costs properly incurred by the Proprietor pursuant to the said paragraph" (par. (i)) "and the amount of any direct loss and/or damage caused to the Proprietor by the determination and any other liability of the Builder to the Proprietor under this Contract and shall certify all of the same", and provides that the architects shall ascertain whether such sum together with amounts previously paid to the builder exceeds or is less than the amount which the proprietor "would otherwise have been required to pay under this Contract", i.e. the balance of the adjusted contract price. They are thus to ascertain the balance that is to be paid by the proprietor or the builder as the case may be. It appears to me that the two "documents" of 30th January 1975 are the result of that process under cl. 22 (c) (iv), though they do not use the word "certify". They ascertain the cost to the proprietor of completion of the works and ascertain the excess over what would otherwise have been payable, i.e. $388.24. The result of that calculation is therefore that there is no amount to become due to the builder under cl. 22 itself. This calculation is the equivalent of the preparation of a final certificate under cl. 31 which also ascertains the amount due to the proprietor or the builder as the case may be. Only by that process is any amount due to the builder ascertained and so also under cl. 22. Under cl. 31 the manner of dealing with the retention fund or the security follows after the conclusion of that process. It appears that the amounts which were due to sub-contractors (other than nominated sub-contractors) at the date of termination had not been paid to them by the proprietor. It is, however, common ground that those amounts had been included in architects' certificates issued prior to 11th September 1974 and paid by the proprietor to the builder. In fact, the proprietor has not paid those sub-contractors, but the summons asks whether it "is entitled to pay to the sub-contractors . . . $116,259.90 out of the retention fund held by (it)". More properly expressed, the question would seem to be whether it is entitled to recoup itself out of the guarantee moneys for amounts paid to sub-contractors. (at p373)
21. The argument for the proprietor was that cl. 22 (c) (ii) gave the proprietor an authority to pay sub-contractors, and that the consequence of such a payment would be that the proprietor would have a claim against the builder for reimbursement. However, this expression of the effect of the clause overlooks the fact that the authority is only to deduct amounts so paid from sums due to the builder. Such payments are not made on behalf of the builder and, moreover, if there were no such sums, there would be no basis upon which the proprietor could recoup payments which it had made to sub-contractors. If claims against the builder arose merely from the making of payments by the proprietor to a sub-contractor, there would be no need to provide that such amounts might be deducted from payments due to the builder, because a right of set-off would exist without express provision. Accordingly, I regard the proprietor's right as one of deduction only. (at p373)
22. In a case where there was a retention fund properly so-called, there would be a basis for arguing that the amount of the retention fund was "due or to become due to the Builder". Even this is not strictly accurate, because the accounting for the retention fund requires all payments either way to be made before the fund is released. The fund is held in a joint account in the names of the proprietor and the builder on trust for the proprietor, but cl. 31 produces the result that the retention fund is "released" by the proprietor to the builder as a whole after all adjustments have been made. There is no express provision dealing with how the retention fund is to be dealt with in the case of termination of the builder's employment, but it could properly be described as an amount due or to become due to the builder. It is after all part of the contract price to which the builder in the ordinary way would become entitled if the contract ran its full length and must be taken into account in ascertaining what "would have been otherwise payable under this Contract" for the purposes of the accounting required under cl. 22 (c) (iv). In that context it would be appropriate to regard it as an amount "due or to become due" to the builder. There are, however, other possible situations where notwithstanding the termination of the employment of the builder there may be amounts due or to become due to it. I assume for present purposes that amounts in architects' certificates which are overdue for payment would cease to be payable by virtue of cl. 22 (c) (iv), and enter into the accounting only as reducing the cost to the proprietor of completing the works and as part of what would otherwise have been payable. In a case where the retention fund is less than $4,000.00, it would be an amount due or to become due to the builder and would be available for recoupment of payments to sub-contractors. Neither a security itself, nor the proceeds of realizing a security (whether by demand on the guarantor for payment or by sale of property charged) can be regarded in any sense as "moneys due and payable to the Builder". In so far as such moneys may be found to be in excess of the loss or damage suffered by the proprietor the balance would be payable to the surety itself, whatever the rights and duties might be as between the surety and the builder. A guarantee properly so-called is of the same character; only the amount of the loss is payable by the guarantor, and any "unused" amount up to the limit of the guarantee would be "retained" by the guarantor, or more accurately, not paid over. There would be no basis on which that could be demanded by the proprietor nor could it be regarded as payable to the builder. A security in the form of a written promise by a third party to pay up to a stated amount would be in exactly the same position. However, if the builder itself were to give a charge over its own property to serve as security, and if recourse to that security by exercise of a power of sale by the proprietor produced a sum in excess of that required to meet its loss or damage, any balance remaining might be described as "due or to become due to the Builder" and as such be available to reimburse the proprietor for payment of sub-contractors. (at p375)
23. It was argued that in the case of nominated sub-contractors there was under cl. 15 (c) a right in the proprietor to pay them, and that therefore a debt would arise owing by the builder to the proprietor with an implied undertaking to pay it, and that the same was true under cl. 22 (c) (iv). Clause 15 (c) is, however, dealing with a situation where the employment of the builder has not been terminated, and under it the architects are empowered, before issuing a certificate, to require the builder to provide reasonable evidence that amounts included in previous certificates and referable to work done by nominated sub-contractors have been paid by the builder. If not so satisfied the architects may notify the proprietor who, after notice to the builder, may pay and then deduct sums so paid from amounts due or to become due to the builder. In that context "amounts due or to become due" plainly means amounts specified in certificates by the architects. Under cl. 15 (c) there is no express provision creating a duty on the builder owed to the proprietor to pay the nominated sub-contractors. The proprietor is given a restricted authority (for its own benefit) to pay nominated sub-contractors and thereafter to deduct amounts so paid from any sum due or to become due to the builder. Even if that sub-clause would, where payment to sub-contractors were made, give rise to an implied obligation on the builder to pay, the position under cl. 22 (c) (ii) is very different. (at p375)
24. The builder owes no contractual duty to the proprietor to pay sub-contractors, so that failure to pay is in no sense a breach of the building contract. There is no request express or implied by the builder that the proprietor should make payments to the sub-contractors, nor could such payment, if made, be said to be made on behalf of the builder. It is conceded that, if as a matter of practical necessity the proprietor had to pay the sub-contractors for past work not paid for by the builder in order to get the works completed, then the amounts so paid would be part of the costs incurred for the purposes of cl. 22 (c) (i) and therefore "properly incurred" so as to be brought into the calculation under par. (iv) of that sub-clause as a debit against the builder. (at p375)
25. It was argued that the Bank was not a surety and had therefore no claim on any balance of the amount remaining after the amount of loss or damage incurred by the proprietor had been met; it was said that accordingly moneys held by the proprietor were due and owing to the builder. (at p375)
26. I am unable to accept this argument. It seems to me clear that the Bank is a surety for the due performance of the builder's obligations under the building contract. It does not for this purpose matter whether the bank guarantee is on a proper analysis a guarantee, or an unconditional written promise to pay, or even a promissory note. There is on any view an express-cross reference to the building contract and to the Bank's undertaking being given in consideration of the proprietor's dispensing with the retention fund, itself a form of security. It is well settled that an obligation upon its face absolute may in truth be by way of surety if the other party had full knowledge of the circumstances: see Jenkins v. Wyatt (1900) 21 LR (NSW) 322 and Rowlatt on Principal and Surety, 2nd ed (1926), pp. 4-5. See also Jowitt v. Callaghan (1938) 38 SR (NSW) 512, at pp 516-517 , per Jordan C.J.; Permanent Trustee Co. of New South Wales Ltd. v. Hinks (1934) 34 SR (NSW) 130, at pp 138-140 , per Jordan C.J.; and Re Conley (1938) 2 All ER 127, at pp 130-131 , per Greene M.R. The building contract itself makes it plain that the bank guarantee is to be by way of security only and is not an independent obligation; this would create the relationship of principal and surety between the builder and the Bank. An alternative open to the builder is to provide security of its own, for example, by way of mortgage or charge over its own property, to secure its performance of its contract. (at p376)
27. It follows from this conclusion that the argument for the proprietor that it is entitled to use the money received from the Bank for whatever purposes it likes must be rejected, as must be the argument that such money, or any surplus, must be paid to the builder and is accordingly due or to become due to the builder. (at p376)
28. It was further argued that, even if no liability on the builder arises from payment to sub-contractors, it is still an authorized payment and by analogy with the retention fund any balance must go to the builder. This, however, is to press the analogy too far. The retention fund, or any balance of it, must go to the builder because it is part of the contract price. The guarantee fund is not part of the contract price, but is an additional amount payable in certain circumstances and available to meet loss or damage arising from failure by the builder to complete the works. This difference is, in my opinion, of critical importance and because of it the analogy with the retention fund breaks down at this point. (at p376)
29. If the proprietor had called up the bank guarantee because of the happening of some event under cl. 22 (c), but had not terminated the employment of the builder, and the builder had then completed the works, certificates in respect of that work would be issued by the architects from time to time, and would have been payable by the proprietor. The ordinary procedure for accounting under cl. 31 would follow and the security would be dealt with under par. (j). I do not think that that provision can be read as conferring on the builder any additional interest in or power over moneys called up under the bank guarantee. Clause 31 (j) is expressed in terms of a security being "handed back" to the builder, but that is capable of literal application only to property of the builder which it has provided as security. If the security is provided by a third party, the builder, if it receives it, would plainly hold whatever security was "handed back", whether money, bonds or documents of title to mortgaged property, upon trust for the person who provided the security. The proprietor would have knowledge of such trust from the nature of the security and the circumstances in which it had treated the security as "acceptable" under cl. 30 (c). (at p377)
30. Moreover, under cl. 31 (i) the release of the security occurs after the final certificate is given and any adjusting payment made. This requires payment by the builder before the security is released. This seems to me to reinforce the view that the builder has no interest in the security, unless it is its own property which was charged in favour of the proprietor. (at p377)
31. For those reasons I am of opinion that the proprietor has no right of recoupment out of the bank guarantee moneys in respect of amounts which it may pay to sub-contractors. It is, therefore, not necessary for me to deal with the basis on which Hutley J.A. decided in favour of the Bank, namely that the claim for the right of recoupment was made too late in view of the drawing up of the statements by the architects on 30th January 1975 and I express no opinion on it. (at p377)
32. In my opinion this appeal should be dismissed. (at p377)
ORDER
Objection to competency overruled. Appeal allowed with costs. Order of the Supreme Court of New South Wales, Court of Appeal Division, set aside and in lieu thereof order that the appeal to that Court be dismissed with costs.