10.04.2024

Call me? Care is required when calling on a bond

In the recent High Court decision Hawkins Ltd v Elizabeth Properties Ltd, Hawkins was successful in preventing EPL from calling on a $3m bond pending determination of a dispute principally over the applicability and validity of liquidated damages. 

Factual background

Hawkins was the contractor for the Elizabeth Street Development in Tauranga (the Development), a mixed-use commercial and residential site with retail space alongside 97 apartments and 23 luxury townhouses.  Elizabeth Properties Ltd (EPL) was the Principal. 

The contract was entered into on 23 August 2019.  It was a NZS3910:2013 standard-form contract, with special conditions (including setting out additional pre-conditions for calling on a bond), for a fixed price lump sum amount of $148.9m (plus GST).

The development suffered significant delays, and the parties entered into a “reset agreement”.  Further delays were still incurred.  A dispute arose between the parties about the applicability and validity of liquidated damages (LDs) under the contract. 

Dispute

Hawkins issued a notice of adjudication on 15 November 2022, in response to EPL applying LDs as a deduction from a payment claim it had issued.  Hawkins alleged EPL’s claims for LDs failed because the reset agreement did not address LDs and therefore no LDs mechanism existed.  Alternatively, it claimed that LDs would be a penalty given EPL had been able to access retail store areas for fitout some months before public opening. 

On 21 December 2023, following a one-year pause for possible settlement, EPL wrote to Hawkins requesting payment of $22,526,500 for LDs.  Hawkins disputed EPL’s entitlement to the LDs on 9 January. 

This caused EPL to write to the Engineer, who made a deduction of $22,784,000 from Hawkins’ latest payment claim.  On 25 January 2024 EPL wrote to Hawkins and gave notice that Hawkins had breached the contract by failing to pay the LDs it claimed were due, which required remedy (i.e., full repayment) within 10 working days, failing which, EPL would convert the $3m bond into cash against the amount owing by Hawkins. 

EPL wrote to the Engineer on the same day requesting a certificate of the Engineer’s opinion that Hawkins had breached the contract as a result of not paying any of the LDs.  This was issued on 19 February 2024, and stated it was made “following fair and impartial consideration”.

On 9 February 2024, Hawkins urged the Engineer to take into account all of the material.  It stated it was willing to provide the material it had submitted in the adjudication.  However, this required EPL’s agreement, which was not forthcoming, leading Hawkins to commence proceedings on 12 February 2024 by applying for an interim injunction preventing EPL from calling on the bond.

An interim court order was made on 14 February 2024, with both parties’ consent, preventing EPL from calling on the bond until further order from the Court. 

The Court’s decision

The law regarding interim injunctions is well settled.  The court first considers whether there is a serious question to be tried.  If there is, the court then considers whether the balance of convenience favours granting or refusing relief.  More broadly, the court must ask where overall justice lies. 

EPL submitted that injunctions to restrain a bond required a higher threshold – a “strong case” rather than a “serious question to be tried” – which the Court rejected.  The question was whether there was a serious question that EPL was not entitled to call upon the bond given Hawkins’ position that it was not in default by declining to pay LDs, the pending adjudication dispute and the manner in which the Engineer’s certificate was sought and given. 

Hawkins’ submitted that the terms of the bond and the contract provided that it was not payable on demand, and that the Engineer issued a certificate without all of the information, which EPL had incorrectly said he was required to do.  EPL argued this would prevent a call on the bond any time Hawkins asserted a dispute.

Hawkins’ central claim in the High Court was that EPL had breached the contract by requiring the Engineer to issue a certificate when a) Hawkins had not breached any obligation to pay LDs; b) there were questions over the LDs’ validity, which were subject to the adjacent adjudication proceeding; and c) the Engineer was not in a position to independently and fairly consider the relevant facts, which EPL had contractual obligations to ensure.  Because of this, Hawkins claimed the certificate was invalid, so EPL was not entitled to the bond. 

Hawkins argued the delays stemmed both from defects in the Development’s design, which it was not responsible for, and EPL’s failure to address the defects and procure the construction materials it was required to procure.  This, Hawkins claimed, was evidenced by the thousands of requests for information (RFIs) it issued to clarify the design.  EPL argued Hawkins had failed to achieve the due dates for completion, and that EPL had tried to recover some of the subsequent losses via LDs initially, then the bond. 

Hawkins also claimed an Engineer’s certificate issued in response to EPL’s request would be invalid, for the same reasons.  It sought an injunction until further order of the Court. 

The Court held that the combination of the contract terms identified, together with the actions of EPL and the Engineer, gave rise to a serious question to be tried that EPL was not lawfully entitled to call upon the bond.  The dispute extended to whether LDs were payable at all on a proper construction of the contract and the reset agreement, and whether the Engineer’s (and EPL’s) actions gave rise to a serious question about the Engineer’s reasonable opinion (including EPL’s influence on this). 

For the “balance of convenience” limb of the test, the Court held that damages (the usual remedy) were not a sufficient remedy for Hawkins, who argued that calling on the bond would cause it irreparable reputational harm with clients, future tenderers, and amongst the industry generally.  Payment of damages would not be enough to avoid the reputational harm.  This, along with the limited period of an interim order, and Hawkins’ agreement (in the initial court order) preventing release of the bond (normally on practical completion), meant that overall justice favoured continuing to restrain a call on the bond pending the adjudicator’s determination.  The determination is due this month (April). 

Our comment

A bond can be an important part of the security arrangements between two parties to a construction contract.  Provisions relating to calling on the bond should be specifically considered when drafting the contract.  Further, parties need to carefully consider the express terms of both the bond and the contractual provisions entitling a party to make a call on the bond before making such a call. 

Particular care needs to be taken if the purpose of the call is in response to delays which are the subject of a dispute as to who is responsible for them, or where procedural requirements and certification by the Engineer are prerequisites to a call on the bond (as is the case in NZS3910).  In this vein there have been some important amendments from NZS3910:2013 to NZS3910:2023 regarding the Engineer’s obligation to provide notice of an estimate of any cost for remedial works.

If you have any questions about this case, construction bonds or security arrangements more generally please get in touch with our Construction Team or your usual contact at Hesketh Henry.

Disclaimer:  The information contained in this article is current at the date of publishing and is of a general nature.  It should be used as a guide only and not as a substitute for obtaining legal advice.  Specific legal advice should be sought where required.

Do you need expert legal advice?
Contact the expert team at Hesketh Henry.
Kerry
Media contact - Kerry Browne
Please contact Kerry with any media enquiries and with any questions related to marketing or sponsorships on +64 9 375 8747 or via email.

Related Articles / Insights & Opinion

Complexities of contract termination – High Court calls halt on the Contractor’s process in Rau Paenga v CPB
The High Court in Rau Paenga Ltd v CPB Contractors Pty Ltd [2023] NZHC 2947 granted an interim injunction preventing the Contractor from suspending and terminating its contract for the construction of...
30.05.2024 Posted in Construction & Disputes
iStock  Employment Concept
Court of Appeal overturns Employment Court decision stripping family carers of their employment status
Two parents of disabled adult children have lost their status as employees of the Ministry of Health (MOH). The Employment Court had previously found that they were “homeworkers” and therefore emp...
29.05.2024 Posted in Employment
vadim kaipov  kIqhmxc unsplash med
Is working from home still working?
There are conflicting views on whether working from home is effective. Research conducted by Massey University at the end of 2023 found that around 40% of workers were doing hybrid work. This was an i...
23.05.2024 Posted in Employment
The Legal500 Construction Comparative Guide
The Construction team at Hesketh Henry is the exclusive New Zealand contributor to The Legal 500: Country Comparative Guide for Construction.  Partners Glen Holm-Hansen and Helen Macfarlane along wit...
21.05.2024 Posted in Construction
Government trumps Member’s Bill with the Contracts of Insurance Bill 2024
It now seems there is at least the possibility 2024 will be the year New Zealand finally sees the reform of insurance law with the Government’s own bill, the Contracts of Insurance Bill, now before ...
16.05.2024 Posted in Insurance
Computer Hand Wide
Privacy Commissioner releases draft biometrics privacy code
Biometrics is a trending issue and with the development of technology there are consistently more ways biometric data can be used, from replacing a password to identifying repeat shoplifters in a shop...
03.05.2024 Posted in Business Advice
Building Permit
Build-to-Rent (BTR) Basics
If the term Build-to-Rent is new to you, you are probably not alone.  Unlike countries such as the USA, UK and Australia where BTR is well established, the BTR sector is still emerging in New Zealand...
26.04.2024 Posted in Property
SEND AN ENQUIRY
Send us an enquiry

For expert legal advice, please complete the form below or call us on (09) 375 8700.