NSW Court of Appeal provides certainty for Head Contractors in Managing Subcontractor Bank Guarantees
Intercon Engineering & Wright v Lend Lease Building Pty Ltd  NSWCA 463
Why this matters
In a recent unanimous decision by the New South Wales Court of Appeal, Lend Lease successfully defended claims by two subcontractors, Intercon Engineering & Wright, seeking the return of bank guarantees held as security for performance on a defence project at Mulwala.
Blackstone Waterhouse acted for Lend Lease in this victory for contractual certainty.
The decision should be of comfort to head contractors as it supports industry practice that a head contractor can tie the return of bank guarantees from a subcontractor to a date under its head contract (such as Practical Completion or in this case ‘Final Acceptance’).
The Court’s decision reflects the importance of certainty for industry participants. It would not be appropriate to alter subcontract terms relating to bank guarantees as between head contractor and subcontractor unless:
- the literal meaning of the words in a contract are absurd; and
- the objective intention of the parties is self-evident.
In this matter, the Court of Appeal’s decision reflects a clear understanding of the risk allocation and commercial purpose of such ‘back to back’ security arrangements.
Intercon Engineering and the Wrights each entered into subcontracts with Lend Lease to perform works in respect of the Mulwala Redevelopment Project.
The relevant terms of each subcontract were identical.
Lend Lease was the head contractor on the project having entered into a head contract with the Commonwealth.
The subcontracts provided for the retention of bank guarantees and/or retention monies by Lend Lease.
Pursuant to clause 10.10.1, the subcontractors were entitled to the release of those securities following the expiry of the Defects Liability Period and the provision of a written request to Lend Lease.
The Defects Liability Period was defined as commencing on the Date of Substantial Completion and expired ’24 months after the Date of Final Acceptance (as defined under the Head Contract).’
The Date of Final Acceptance under the Head Contract was defined by reference to the completion of the works that Lend Lease had to perform under the Head Contract.
The parties agreed facts including that:
- the Date of Substantial Completion under each of the subcontracts was more than 24 months ago;
- the subcontractors had requested the return of the securities;
- there were no outstanding notices of defects under the subcontracts; and
- the Date of Final Acceptance under the Head Contract had yet to be achieved
The subcontractors argued that the subcontracts should be read such that the Defects Liability Period expired 24 months after the Date of Substantial Completion under the subcontracts rather than the Date of Final Acceptance under the Head Contract. It was contended that this would give effect to the commercial purpose of the clause allowing Lend Lease to withhold monies until all obligations under the subcontracts had been performed.
At trial, the subcontractors argued that the ‘Date of Final Acceptance’ under the Head Contract was void for uncertainty. This argument was raised on the basis that the date could not be ascertained when the subcontracts were executed and because the subcontractors were not provided with a copy of the Head Contract.
In the Supreme Court, his Honour Justice Ball rejected the subcontractors’ arguments finding that the relevant subcontract clauses:
 fix the date for the expiry of the Defects Liability Period by reference to a date determined in accordance with the Head Contract…
 The commercial purpose behind defining the Defects Liability Period under the subcontracts by reference to the Date of Final Acceptance under the Head Contract is clear… Lend Lease plainly did not want to be in a position where it had to release guarantees or retention amounts under its subcontracts before the Defects Liability Period under the Head Contract had expired…
Any ambiguity in the relevant clauses was to be resolved by the usual principles of construction of agreements giving effect to the objective intention of the parties.
The trial judge, his Honour Justice Ball, held Lend Lease were entitled to retain the securities.
Issues on Appeal
The subcontractors initially appealed on the basis that:
- his Honour erred in his statements as to the commercial purpose of the ‘back to back’ security arrangements relating to the subcontractor’s bank guarantees;
- his Honour should have had regard to the agreed facts above and that the Date of Final Acceptance under the Head Contract may never be achieved; or
- his Honour ought to have found that on a proper construction of the subcontracts, the Defects Liability Period expired 24 months after the Date of Substantial Completion.
By an amended notice of appeal, the subcontractors also sought to argue that:
- the Date of Final Acceptance under the Head Contract does not enable the Date of Final Acceptance to be ascertained; and
- having regard to the Head Contract, the subcontracts should be construed by reference to the Date for Final Acceptance, which was the date Lend Lease was required under the Head Contract to achieve Final Acceptance at the time the subcontracts were executed. The subcontractors contended that the construction accepted by Justice Ball at trial was an absurdity.
Lend Lease successfully opposed this latter argument as it had not been raised at trial but consented to the Court of Appeal deciding all of the subcontractors’ arguments in the interests of commercial certainty. These further arguments were also determined in Lend Lease’s favour.
The Court of Appeal’s judgement
In dismissing the subcontractors’ appeal on all grounds, her Honour Beasley P delivered the lead judgment (Macfarlan JA concurring) in finding:
 In order to supply, omit or correct the words in a contract, the literal meaning of the contractual words must be an absurdity and the objective intention of the parties’ must be self- evident.
 The literal meaning of the Defects Liability Period in the subcontracts was not absurd, and the trial judge therefore did not err in giving effect to it;
 Parties could agree that a date in a contact, either for the accrual of a right or for a liability to end, be fixed by reference to a future event in respect of which a date is not known; and
 The subcontracts should be construed by reference to the Head Contract in its form as at the date of entry into the respective subcontracts.
His Honour Emmett JA concurred with her Honour in a separate judgment highlighting the subcontractors’ arguments each failed by the application of ordinary commercial principles of commercial construction. There may be very narrow circumstances where arguments relating to breaches of the Head Contract by Lend Lease or a want of good faith might be raised to challenge clauses of this nature – no such arguments were led in this matter.
These types of ‘back to back’ security arrangements are very common in major infrastructure projects.
There are many important commercial reasons for such ‘back to back’ arrangements – for example, often defects in subcontract works are not able to be identified until the completion or commissioning and testing of the entirety of head contract works for a project.
Head contractors should take comfort in the clear regard the Court of Appeal has had to the risk allocation which had been agreed by the parties.
Subcontractors should ensure they understand their obligations when committing to such arrangements – the judgment provides very little room to try and get around such provisions as the Court recognises the commercial purpose of such securities.
Blackstone Waterhouse regularly advises contractors on their rights to retain (or have returned) bank guarantees and retention monies. From reviewing standard terms for such securities or avoiding disputes relating to such issues, please contact: