Tomkins Commercial & Industrial Builders Pty Ltd v Pacific Diamond 88 Pty Ltd as trustee for the Pacific Diamond 88 Unit Trust [2024] QSC 321

Andrew Orford  |  Matt Hammond  |  Siobhan Beckett

Key takeouts

• This decision underscores the importance of clear and precise drafting in construction and building contracts.
• A principal may be denied the right to set off liquidated damages against an amount owing to a builder if the contract does not clearly allow the principal to do so. 
• A clause entitling a principal to levy liquidated damages will not independently entitle a principal to set off liquidated damages. 
• The ability to set off must also be expressly provided for in the contract.
  

Facts

In December 2021, Pacific Diamond 88 Pty Ltd as Trustee for the Pacific Diamond 88 Unit Trust (principal) and Tomkins Commercial & Industrial Builders Pty Ltd (builder) entered into a contract, based on an amended form AS4902-2000 (contract).

On 2 October 2024, the principal issued two certificates to the builder:

• Certificate No.5 (liquidated damages certificate): Where the superintendent certified liquidated damages of $2.6 million as due and payable by the builder to the principal; and
  
• Payment Certificate No.32 (payment certificate): Certifying payment in the amount of $694,343.

The liquidated damages certificate stated that the principal ‘may elect to set off’ the certified amount from the amount certified in the payment certificate.  The principal elected to set off the certified liquidated damages against the amount in the payment certificate resulting in a net amount of $1,905,657 being payable by the builder to the principal.

The principal subsequently notified the builder under section 67J of the Queensland Building and Construction Commission Act 1991 (Qld) that it intended to have recourse to bank guarantees provided by the builder as security under the contract in order to recoup the $1,905,657.

In response the builder applied to the Supreme Court of Queensland seeking:

• a declaration that the principal was not contractually entitled to set off; and

• an injunction to the same effect.

The primary question before the court was whether the terms of the contract allowed the principal to set off the liquidated damages against the certified amount owed to the builder.

Decision

The right to set off

Justice Treston determined that the principal did not have an entitlement to access the security provided by the builder under the contract. The key clauses in the contract were:

• clause 34.7 which provided that if the works did not reach practical completion by the date for PC the superintendent was to certify liquidated damages as due and payable for every day after the date for practical completion the works remained outstanding; and

• clause 37.2 which provided that the principal was obligated to pay the builder within 15 business days after the superintendent received a progress claim after setting off any amounts certified in accordance with sub-paragraph (b).

However, the contract did not contain a clause 37.2(b) and it was not immediately clear from the terms of the clause what certificate was to be issued under clause 37.2(b) (if it existed).

The court concluded that:

• Clause 34.7 only dealt with an entitlement to obtain liquidated damages and did not create an independent right to set-off; and

• Clause 37.2 was found to be ambiguous as it referred to the non-existent sub-paragraph (b). The absence of sub-paragraph (b), which was deleted during the drafting process, led the court to consider the deleted words to derive assistance in resolving the ambiguity. The deletion of sub-paragraph (b) had the effect of removing the certification process would give rise to the principal’s ability to set off liquidated damages.

The court determined that the notices from the principal to the builder were invalid and of no effect.  The principal was ordered to pay to the builder $694,343.00 and interest on that amount, plus the builder’s costs of the application.

Injunction

It was not strictly necessary to decide the issue, but that it was established law that there were limited circumstances in which a court will prevent a party from having recourse to a bank guarantee and that injunctive relief would not be lightly granted. The court would need to consider the usual principles arising on an application for an interlocutory injunction, being whether there was a serious question to be tried and the balance of convenience.

In the current matter, the court found that there was a serious question to be tried, given that the amounts involved were not insignificant and that there was a factual dispute as to whether the superintendent’s certifications were correct, which would need to be resolved at arbitration.

If the balance of convenience question had been necessary to answer, it would have favoured the grant of the injunction because the period of the injunction would have been quite short. The contract preserved the right to grant an injunction, the builder was prepared to extend the bank guarantees providing security to the principal and finally, there was a risk that the Builder would not be repaid had the guarantee been drawn down. The court also noted that minimising any reputational risk to the builder was a consideration, but was of much lesser weight than the other factors.