Total Construction Pty Ltd v Catholic Healthcare Limited [2023] NSWSC 585

Andrew Hales  |  Karen Hanigan |  Sean Cooley

Key takeout

• On the wording of the security recourse clause in this case, the principal did not have to show that it had suffered loss in order to have a bona fide claim, instead it was required to have an ‘honest and genuine belief that the contractor is in default under the contract on a basis that is not specious, fanciful or untenable’.

• It is common for construction contracts to contain a clause that allows the principal to have recourse to unconditional security provided by the contractor, but it must be based on the principal having a ‘bona fide’ claim.

Facts

This case related to a design and construct contract between Total Construction Pty Ltd (contractor) and Catholic Healthcare Limited (principal).

The contractor agreed:

• to provide two bank guarantees for a total value of $1,579,408.06 (security);
• that it would be in breach of the contract if it:
  • substantially departed from the program without reasonable cause; or
  • had a material detrimental change in financial position; and
• to indemnify the principal for any cost, expense, loss, damage or other liability it suffers or reasonably anticipates it will suffer as a result of taking work out of the contractor’s hands or terminating the contract.

The security clause provided that the principal would have recourse to security if it had a bona fide claim that the contractor was in default under the contract.

In early May 2023, the principal served the contractor with a show cause notice which identified a number of substantial breaches of the contract, including that:

• the contractor had substantially departed from a program without reasonable cause; and
• there had been a material detrimental change in the contractor’s financial position.

The contractor responded to the show cause notice, but did not provide a substantive response.  The principal subsequently terminated the contract, giving extensive reasons for doing so.  On the same day as the termination notice, the principal served a ‘Principal’s demand for payment pursuant to the indemnity’ in the amount of $11,900,892.35. The amount was calculated as the difference between the ‘cost to complete as assessed’ and the amount that the contractor would have received if it had completed the work.

Injunction proceedings

On 23 May 2023, Ball J granted an ex parte interlocutory injunction restraining the principal from having recourse to the security.

The contractor argued that the principal was not entitled to call on the security because:

• on the correct construction of the contract, the principal was not entitled to call on the security; and
• the principal could seek relief for unconscionable conduct under section 20 or 21 of the Competition and Consumer Act 2010, Schedule 2 (Australian Consumer Law) (Cth) (ACL).

On 26 May 2023, the contractor sought an extension of the existing injunction.

Decision

The court refused to extend the injunction and ordered the contractor to pay the principal’s costs on an indemnity basis, as it did not have a reasonable argument for why the principal acting in good faith could not call on the security.