Facts

On 2 October 2007, the defendant property developer entered into a construction contract with the plaintiff builder for the construction of a mixed commercial and residential development in Sydney (“the Contract”).  Notably, the developer as Principal was also appointed as Superintendent under the Contract.

The project involved three stages and the first and second stages were certified as complete on 24 November 2008 and 3 December 2009, respectively. 

On 8 December 2009, the parties entered into an Advanced Payment Deed where the developer agreed to advance to the builder part of the contract sum being the amount of $2M.  The builder agreed, under the Deed, to provide to the developer as security for the advance two unconditional bank guarantees for the amount of $1M each.  The advance was repayable on, amongst other things, the date that practical certification was certified for Stage 3 of the works.

By May 2010, the parties were in dispute because the developer asserted that the builder had failed to complete works under the Contact and as a result the developer was not able to settle sales to purchasers.  Whereas the builder claimed that the developer owed certain money’s to it.

On 21 June 2010, the developer in its capacity as Superintendent issued:

  1. a “Notice of Variation to the Works” which varied the Contract and provided that all incomplete works and work yet to be performed had been deleted from the Works under the Contract.; and
  2. a Certificate of Practical Completion which provided that practical completion of Stage 3 had been achieved on 21 June 2010. 

The developer then made a demand on the Bank for the full amount of the Guarantees.  The builder, as a result, urgently applied to the Court to obtain an interim injunction preventing payment being made.

Issues

In summary, the builder put forward that the developer should be restrained from calling on or being permitted to call on the Guarantees because, amongst other things, the Certificate of Practical Completion was invalid or vitiated; or in the alternative should be set aside pursuant to the Trade Practices Act 1974 (Cth) on the grounds that the developer engaged in unconscionable conduct.

Alternatively, the developer argued the Notice of Variation and accordingly the Certificate of Practical Completion were valid and even if such documents were invalid the Guarantees reflects an unconditional right on the developer to make a demand. 

Decision

Justice Hammershlag held that the variation that the Notice of Works purported to bring about was not authorised and as such the Certificate of Practical Completion was not valid. In making this finding his Honour considered that:

  1. the Contract contemplates the Works being something which have a “stated purpose” and which will, when practically complete, be reasonably capable of being used for that purpose; and
  2. since the deletions from Stage 3 are of such a profound nature, his Honour considered that, the partially constructed buildings cannot be reasonably capable of being used for their “stated purpose” that is, as commercial and residential buildings.

Further, his Honour stated that the Contract provided that in exercising the functions of Superintendent, the Superintendent must act honestly and fairly even where the developer and Superintendent were one and the same person.

His Honour held that the Superintendent did not act fairly in issuing the Notice of Variation or the Certificate of Practical Completion because the Superintendent paid no or insufficient regard to the builder’s interest and did not act with any impartiality or with a degree of impartially which was required of him.  In particular, the deletion by the Superintendent of the majority of the work and the self serving aspect of direction (to gain access to the Guarantees) was evidence of the Superintendent’s lack of independence. As such, his Honour concluded that the Certificate of Practical Completion was vitiated as a result of the failure by the Superintendent to act fairly.

His Honour granted relief to the builder in the form of an injunction and in the circumstances, the developer was not entitled to call on the Guarantees.