Adelaide Interior Linings Pty Ltd V Romaldi Constructions Pty Ltd – Case Analysis

Question 1

Adelaide Interior Linings Pty Ltd v Romaldi Constructions Pty Ltd

Very briefly outline the facts of each case including the contractual provisions under scrutiny (10 marks);

• Romaldi Constructions entered into a construction subcontract with Adelaide Interior Linings for the installation of lining at a college which was being constructed by Romaldi Constructions.
• Adelaide Interior did work on site but a dispute arose with Romaldi Constructions in relation to the quality of the work.
• Adelaide Interior left the site and Romaldi then engaged another subcontractor to complete the work.
• Adelaide Interior issued invoices for work at Burc College and Romaldi Constructions refused to pay.
• Later, Adelaide Interior issued a payment claim pursuant to the BCISP Act and applied for an adjudication of the same, which resulted in an adjudicated amount of $51,219.83 in its favour.
• The adjudication determination required Romaldi Constructions to pay the Adjudicated Construction Alert First series of cases on the SA Security of Payment Act July 2013 Amount within five business days; otherwise, Adelaide Interior was entitled to enforce payment by obtaining an adjudication certificate and filing it as a judgment debt pursuant to the BCISP Act.
• Romaldi Constructions refused to pay the Adjudicated Amount and, instead, initiated proceedings in the District Court in relation to its underlying claims against Adelaide Interior and sought an injunction restraining it from enforcing the adjudication.
• In these proceedings, Romaldi did not challenge the validity of the adjudication, but claimed the cost of completing the work from Adelaide Interior.
• In a preliminary hearing in the District Court, Romaldi was successful in obtaining an injunction which prevented Adelaide Interior from enforcing payment of the Adjudicated Amount.[1]

Explain the court’s reasoning in each case and the extent to which it is consistent with, or differs from, the reasoning in the other cases (20 marks); and

Adelaide Interior appealed against the interim decision of the District Court to the Supreme Court of South Australia where Justice Anderson upheld this appeal and allowed Adelaide Interior to seek to enforce payment of the Adjudicated Amount pursuant to the BCISP Act. The Supreme Court held that the process contemplated by the BCISP Act involved Adelaide Interior enforcing payment of the adjudicated amount and that, by preventing this, the District Court had permitted Romaldi to circumvent the provisions of the BCISP Act. In his decision, Justice Anderson also noted that the provisions of the BCISP Act establish a ‘pay now, argue later’ mechanism which creates a regime for the payment of amounts owing to subcontractors, and prevents a party such as Romaldi from delaying payment of adjudicated amounts.

Provide your opinion as to whether you agree with the findings made by the court in each, and why (10 marks).

Walton Construction (Qld) Pty Ltd v Venture Management Resources International Pty Ltd

Very briefly outline the facts of each case including the contractual provisions under scrutiny (10 marks);

Walton entered a building contract with VMR and Walton provided VMR with an unconditional bank guarantee as security for its obligations under the contract. Walton made a payment claim fromVMR and in response, the Superintendent issued a progress certificate certifying that payment was due to be paidbyWaltonto VMR.The contract required the Superintendent to allow in a payment certificate "amounts otherwise due from the Contractor to the Principal arising out of or in connection with the Contract." The Superintendent had calculated the amount by subtracting from Walton's payment claim, an estimated amount for the cost of resolving allegedly defective work as well as an amount of liquidated damages for late completion. In respect of certifying deductions for defective works, clause 35.3 of the Contract permitted the Superintendent to issue directions to the Contractor to correct material or work. If the Contractor failed to comply with the direction within the required notice period, then the Superintendent was entitled to certify an amount due from the Contractor to the Principal for correcting the defective works based on the lowest of three quotes received from independent contractors. That amount, would then become a debt due from the Contractor to the Principal. The Contract further provided that if the Contractor failed to make payment pursuant to the payment certificate within a stipulated time, then the Principal may have access to the security. Walton applied for an injunction restraining the principal from accessing the security because the superintendent failed to comply with the certification process under the contract and the superintendent was unlicensed and therefore the certification had no effect.[2]

Explain the court’s reasoning in each case and the extent to which it is consistent with, or differs from, the reasoning in the other cases (20 marks); and

• The court granted the injunction because
  • Walton argued that the Superintendent didn’t comply with clause 35.3 of the contract and therefore the payment certificate was deficient. The Court held a negative stipulation did arise. That is, a principal could not have recourse to the security unless it became entitled to do so by proper performance of the contract (i.e. by complying with clause 35.3). Accordingly, as the Superintendent did not comply with the requirements of clause 35.3 in relation to valuing the corrective work, the principal's right to call on the bank guarantees had never arisen.[3]
  • the Superintendent had failed to comply with the strict certification requirements under the payment provision;
  • the Contractor had already invoked the process under the Contract to dispute the Superintendent’s certification, by seeking an expert review of the certification, and the expert determination had not been completed. The Contractor argued that the obvious commercial purpose or business common sense was to prevent recourse to security where the contractor was in the process of disputing the Principal’s rights;
  • the Superintendent was not properly licensed under the s42 of the Queensland Building Services Authority Act 1992 (Qld) and therefore the certification had been performed unlawfully; and
  • as a result, the balance of convenience justified an injunction as the Contractor would suffer irreparable harm in respect of their reputation in the building industry, going beyond that which may be cured by way of damages, in the event the guarantees were called.[4]

It is similar to vos

Provide your opinion as to whether you agree with the findings made by the court in each, and why (10 marks).

The case has important implications in relation to the drafting and administration of construction contracts. If it is the intention of the parties that security, by way of a bank guarantee, is to be “as good as cash”, then there should be no limits or preconditions included in the contract as to recourse, and the entitlement to call should not be subject to some form of entitlement under the contract being established. It also illustrates the importance of strictly following contractual processes in order to found an entitlement to payment before a call upon a guarantee is made or foreshadowed.[5] LESSONS LEARNED For Principals

• In terms of drafting contracts, if the purpose of security in the form of a bank guarantee is to be ‘as good as cash’, principals should minimise any preconditions to the ability to call on security.
• In terms of administering contracts, to avoid getting bogged down in interlocutory proceedings, principals (and superintendents) need to be acutely aware of the necessary preconditions and limits on their rights to call on security.

For Contractors

• Although it goes without saying that contractors should make themselves aware of the circumstances under which a principal may call on security, it is also important that a contractor acts quickly if it wishes to ‘block’ an attempt to call on its security.A failure to so do may mean that the principal will cash the guarantee which may result in more costly proceedings for recovery down the track as well as damaging the contractor's ability to procure bank guarantees in the future.

Vos Construction & Joinery Qld Pty Ltd v Sanctuary Properties Pty Ltd & Anor [2007] QSC 332

Very briefly outline the facts of each case including the contractual provisions under scrutiny (10 marks);

• In August 2005, the respondents, joint venturers Sanctuary Properties Pty Ltd and MIRVAC Developments Pty Ltd (Sanctuary), entered into a contract (Contract) with Vos Construction & Joinery Qld Pty Ltd (Vos) for the performance of building work.
• The Contract price was $7,010,606 and Vos provided security for its performance of the project in the form of a bank guarantee.
• The architect extended the date for practical completion from 29 November 2005 to 17 January 2006.
• On 13 February 2006, Sanctuary notified Vos of its intention to claim liquidated damages for failure to complete the project by the adjusted date for practical completion.
• Vos reached practical completion on 21 March 2006.
• The architect issued the final certificate for the project on 8 June 2006.
• On 12 June 2006, Vos disputed the final certificate by notifying the architect in accordance with Clause C8 of the contract. Clause C8 required the architect to assess the dispute and give a written decision to Sanctuary within 10 working days. Vos notified Sanctuary of same.
• On 25 June 2006, the architect, rejecting Vos’s submissions, concluded that the final certificate should stand. Sanctuary gave notice of its intention to draw on Vos’ bank guarantee in the sum of $173,800 (the sum certified by the architect) on the same day.[6]

Explain the court’s reasoning in each case and the extent to which it is consistent with, or differs from, the reasoning in the other cases (20 marks); and

• Sanctuary relied on clauses Clause C5, Clause C6 and Clause C9 of the Contract as the basis of its right to call on Vos’s security.
• Clause C5 significantly provided that:
  • C5 Owner’s right to draw on security - Subject to clause C6, the owner may draw on the security provided by the contractor under clause C1 if:
    • a certificate issued by the architect in favour of the owner under any of clause N4, N11 or Q17 is not paid by the contractor within the period shown in item 4 of schedule 1, or
    • the contractors [sic] engagement is terminated by the owner under clause Q1 or Q2 and the architect has issued a certificate under clause A9 and the contractor has not disputed the owner’s rights under clause A8.(emphasis added).
  • The owner may not draw on security in the form of unconditional guarantees under clause C1 or otherwise unless the owner has given the contractor:
    • Written notice (“the first notice”) to the contractor, within 28 days after the owner becomes aware, or ought reasonably to have become aware, of its right under clause C5.1, advising of the proposed use and, if the amount due can be quantified when the first notice is given, of the amount due, and
    • If the amount due cannot be quantified when the first notice is given, a further notice (“the second notice”) to the contractor within three business days after the owner becomes able to quantify the amount due, advising of the amount due.

• Vos submitted that:
  • Sanctuary had no right to draw the security since Vos had disputed Sanctuary’s rights under Clause A8. Vos argued that once a dispute arose, both parties were bound to follow dispute resolution procedures set out in the contract
  • Sanctuary had breached s 67J of the Queensland Building Services Authority Act 1991 by not giving notice within 28 days of being aware of their rights to payment, and
  • its reputation in the construction industry would suffer if it became known that its security had been drawn down and this should be taken into account by the Court.

In considering Vos’s application the Court dealt with the following issues: Financier’s obligation independent of underlying contract - principle of autonomy-The Court acknowledged that the financier’s obligation in commercial instruments such as bank guarantees is independent of the underlying contract. Generally, courts do not interfere with the financier’s obligation to pay if called to (Boral Formwork & Scaffolding Pty Ltd v Action Makers Ltd [2003] NSWSC 713) because guarantees of this nature and in this context are considered ‘as good as cash’ (Wood Hall Ltd v Pipeline Authority (1979) 141 CLR 443). However, ‘breach of a negative stipulation in the underlying contract which conditions the right to call up the guarantee’ may provide grounds for an injunction to issue (Austrak Pty Ltd v John Holland Pty Ltd [2006] QSC 103). Rights to payment stand unless payment certificate negated - In the Court’s view, the obvious commercial purpose of the proviso in Clause C5.1 was to prevent recourse to the security where the contractor has disputed the owner’s rights under Clause A8 successfully, so as to negate the effect of the earlier certificate. Accordingly, the court held that an unsuccessful dispute could not stall the debt recovery process because that would flout ‘business commonsense’ (Antios Compania Naviera SA v Salen Rederierna AB [1985] AC 191). Right to payment is independent of obligation to follow dispute resolution procedures-Sanctuary’s right to draw down the security for a debt owed was independent of its obligation to resolve its dispute with Vos in accordance with the dispute resolution clauses under the Contract. The Court held that Sanctuary had the right to draw on the security even if the dispute between the parties had not proceeded to final resolution. Notice - Under s 67J(2) of the Queensland Building Services Authority Act 1991, notice of a claim must be given within 28 days of a party becoming “aware, or ought reasonably to have become aware, of the contracting party’s right to obtain the amount owed”. Vos argued that since Sanctuary notified Vos of its intention to claim liquidated damages on 13 February 2006, it must have been aware of its right to payment on that date. It followed that Sanctuary’s 25 June 2006 notice was out of time. The Court held that Sanctuary must have an accrued right to payment before it can be “aware of its right”. That right accrues in circumstances where the architect issues the final certificate. It followed that Sanctuary was well within the time limits if one considered the dates of the architect’s final certificate (8 June 2007) or the architect’s determination relating to the disputed final certificate (25 June 2007). Vos’s reputation did not constitute serious question to be tried - The Court found that the present application turned on questions of construction and not disputed factual matters. It did not consider the argument of industry reputation as constituting a serious question to be tried. Balance of convenience - The Court, for the above reasons, and in its discretion, found the balance of convenience to be in favour of not granting an interlocutory injunction. The judge found that the mere fact that Vos Construction disputed the architect’s certificate under clause A8 of the contract should not be enough to prevent Sanctuary Properties from drawing on the security. The obvious commercial purpose of clause 5 was to prevent recourse to security where the dispute initiated by the contractor was successful. Douglas J also found that Sanctuary Properties’ right to obtain the amount owed to them by drawing on the security did not accrue until the architect’s Final Certificate was issued and there was confirmation of the rejection of Vos Construction’s dispute. Until that had occurred the respondents could not have been aware of their right to obtain the amount owed under the contract.[7] Vos’s reputation did not constitute serious question to be tried- The Court found that the present application turned on questions of construction and not disputed factual matters. It did not consider the argument of industry reputation as constituting a serious question to be tried. Balance of convenience- The Court, for the above reasons, and in its discretion, found the balance of convenience to be in favour of not granting an interlocutory injunction.[8] In the case, the Queensland Supreme Court held that:

• The financier’s obligation in such commercial instruments is independent of the underlying construction contract. This means that a security provided under a construction contract mayprima faciebe called up unless there is a breach of a negative stipulation in the underlying contract which conditions the right to call it up.
• Unless expressly so stated, the dispute resolution clauses of a contract do not affect an owner’s right to draw on the contractor’s security for a debt owed whether, disputed or not.
• The time within which to give notice of an intention to call on a security under s 67J of theQueensland Building Services Authority Act 1991, only begins to run in circumstances where the right to payment accrues to a party, but not before. Here, that did not occur until the issuance of the architect’s final certificate confirming rejection of the applicant’s dispute.
• It was also held that, on the facts, the circumstances that the applicant might suffer embarrassment and loss of reputation within the industry if the call was made did not justify the grant of an injunction.[9]

Provide your opinion as to whether you agree with the findings made by the court in each, and why (10 marks).

---

[1] ‘Pay now, Argue Later’ – Adelaide Interior Linings v Romaldi Constructions [2] https://herbertgeer.e-newsletter.com.au/link/id/zzzz4dcb0f4dde222275/page.html [3] https://herbertgeer.e-newsletter.com.au/link/id/zzzz4dcb0f4dde222275/page.html [4] https://www.mallesons.com/publications/marketAlerts/2010/ConstructionInsights/Pages/Unconditional-bank-guarantees-not-always-a-done-deal.aspx [5] https://www.mallesons.com/publications/marketAlerts/2010/ConstructionInsights/Pages/Unconditional-bank-guarantees-not-always-a-done-deal.aspx [6] https://www.mallesons.com/publications/marketAlerts/2008/Documents/9357337w.htm [7] https://www.mallesons.com/publications/marketAlerts/2008/Documents/9357337w.htm [8] https://www.mallesons.com/publications/marketAlerts/2008/Documents/9357337w.htm [9] https://www.mallesons.com/publications/marketAlerts/2008/Documents/9357337w.htm

Cite this page