Brady Constructions Pty Ltd v Everest Project Developments Pty Ltd [2009] VSC 622 (16 December 2009)

Last Updated: 23 December 2009

AT MELBOURNE

COMMON LAW DIVISION

No. 6597 of 2009

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CIVIL – Appeal from Victorian Civil and Administrative Tribunal decision – Application for injunction restraining respondent from presenting a bank guarantee refused - Tribunal found a serious issue to be tried – Tribunal not satisfied that the balance of convenience favoured grant of injunction - Serious risk the respondent would not be able to repay the bank guarantee or any part thereof if required to do so in future – The Tribunal failed to have regard to critical material considerations affecting the real prospect of a risk of injustice – Matter remitted for further hearing by a differently constituted division of the Tribunal - Bradto Pty Ltd v State of Victoria [2006] VSCA 89 ; (2006) 15 VR 65 - Jones v Dunkel [1959] HCA 8 ; (1959) 101 CLR 298 - Building and Construction Industry Security of Payment Act 2002 - Appeals Costs Act 1998 s 4.

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HIS HONOUR:

1 This is an appeal on questions of law from a decision of the Victorian Civil and Administrative Tribunal made by Senior Member Cremean in the Domestic Buildings List. The decision in issue was a refusal on 1 May 2009 to grant an injunction restraining the respondent from presenting a bank guarantee in the amount of $1,243,883.50. The appeal is brought on two grounds. First it is contended that having found there was a serious question to be tried the Tribunal failed to properly consider the balance of convenience. Secondly it is contended the Tribunal erred in law by failing to take into account matters material to the balance of convenience.

2 The Tribunal correctly stated the applicable legal principles by reference to the decision of the Court of Appeal in the case of Bradto Pty Ltd v State of Victoria:

It was agreed, I think, that the relevant test I should apply is that set out in Bradto Pty Ltd v State of Victoria. In the first place, I must be satisfied there is a “serious question to be tried”. As to that test the Court of Appeal in that case said this:

Whether there is a “serious question to be tried” requires a judgment to be made, for the purpose of which the court or tribunal will examine both the legal foundations of the claim(s) made in the proceeding and such of the evidence in support as is exposed on the interlocutory application. Unless upon such examination the court concludes that the applicant’s claims are not reasonably arguable, that is, they do not have “any real prospect of succeeding”, then the court will ordinarily be satisfied that there is a serious question to be tried.

I must then be satisfied that the “balance of convenience” lies in favour of the grant of the injunction. However, the Court in Bradto reformulated this test as follows:

In our view, the flexibility and adaptability of the remedy of injunction as an instrument of justice will be best served by the adoption of the Hoffmann approach. That is, whether the relief sought is prohibitory or mandatory, the court should take whichever course appears to carry the lower risk of injustice if it should turn out to have been “wrong”, in the sense of granting an injunction to a party who fails to establish his right at the trial, or in failing to grant an injunction to a party who succeeds at trial.

3 There was a dispute before me as to whether the Tribunal found there was a serious question to be tried as to the enforceability of the guarantee in question. But in my view para 15 of the Tribunal's decision makes clear that it determined to proceed on the basis there was. The language of that paragraph reflects the principles stated in Bradto.

I am, however, prepared to assume, for argument’s sake, that I am wrong in this, and that there is a serious question to be tried in the first of the considerations advanced in the way the matter was put by the Applicant. In accordance with Bradto , I am prepared to say, therefore, that I cannot be satisfied that the Applicant's case is not reasonably arguable on the first of those considerations.

4 I would add that in my view it was plainly open to the Tribunal to so conclude. Clause 42.9 of the relevant construction contract stated:

Where within the time provided by the contract any party fails to pay the other party an amount due and payable under the contract, the other party may, subject to Clause 5.6 have recourse to security under the contract, and any deficiency remaining may be recovered by the owner as a debt due and payable.

5 In the circumstances of the case (which it is for present purposes, unnecessary to go into) the appellant raised a serious question as to whether the amount claimed under the guarantee was an amount due and payable under the contract within the terms of this clause. It followed from the Tribunal's conclusion in relation to this first aspect of the test stated in Bradto that the critical issue for the Tribunal was the question of the balance of convenience formulated in the terms stated in Bradto. Before turning to that issue, it is desirable to recite some further background to the underlying dispute.

6 The appellant is a construction company and was contracted to construct a residential apartment tower at 55 Queens Road, Melbourne, with the respondent being the owner of that property. The respondent is part of what is referred to in the materials as the Estate Group of Companies.

7 In about May 2007, the Estate Group of Companies, including the respondent, got into financial difficulties and an administrator was appointed over all the group companies, including the respondent. Subsequently, all the Estate Group of Companies, including the respondent, entered into deeds of company arrangement in or about September 2007, which resulted in the Becton Property Group Ltd paying out two secured creditors and assuming the role of secured creditor to the Estate Group of Companies, including the respondent company.

8 As a result, Becton effectively controls the Estate Group of Companies and is realising its assets as a secured creditor. Subsequent to the entry into the deeds of company arrangement, the terms of the construction contract with the appellant were varied. The variation extended the date of practical completion to 21 February 2008, required the return of two bank guarantees that had been provided by the appellant pursuant to the contract, required the appellant to provide two alternate bank guarantees, and increased the amount payable to the appellant under the contract.

9 Practical completion of the contract was not achieved until 20 March 2008. On 31 May 2008, the appellant submitted a progress claim for a sum in excess of $1 million to the contract supervisor. On 13 June 2008, the supervisor issued a certificate certifying an amount of $657,149 as owing by the appellant to the respondent. This included a deduction for an amount of $738,752 for liquidated damages.

10 The appellant objected to this and made application for adjudication under the Building and Construction Industry Security of Payment Act 2002 . Mr Ian Hillman was appointed an adjudicator, and on 29 July 2008 made a determination in respect of the certificate and the amounts contained therein and certified an amount of $267,273.50 was payable to the appellant by the respondent. The respondent has paid this amount.

11 In his adjudication Mr Hillman determined that no amount was payable for liquidated damages. Despite this rejection of a liquidated damages claim on 14 August 2008 the supervisor issued a further certificate for $738,752 as owing by the appellant to the respondent, being the amount for liquidated damages. The appellant contends this was a duplication of the earlier certification.

12 By letter dated 20 August 2008 the appellant rejected this certification, and on 5 September 2008 Becton stated that unless the amount was paid Everest would institute Supreme Court proceedings in respect of it. It appears that nothing further occurred until 16 March 2009, when an employee of Becton advised the appellant that it intended to call upon the bank guarantee for the amount of liquidated damages.

13 On 17 March 2009 the appellant made an application to the Tribunal for an urgent injunction restraining the presentation of the bank guarantee, and upon the respondent's undertaking not to call on the bank guarantee the matter was adjourned for hearing on 8 April 2009. When the matter came on on that date before Senior Member Cremean both the appellant and the respondent were represented by counsel.

14 On 1 May 2009 the Tribunal refused the injunction application with published reasons. The second ground of the notice of appeal states the factual substratum upon which the appellant now approaches this court. That ground states that:

In concluding that the balance of convenience was not in favour of the appellant the Tribunal failed to consider, and erred in law that:

(1) the only property interests of the respondent are subject to mortgages to Tasovac Pty Ltd, which also has a debenture charge over the respondent;

(2) the respondent is a sole purpose vehicle that developed properties as Spencer Street and Queens Road, the sale of which will result in all moneys being paid to Tasovac Pty Ltd;

(3) the respondent was under external administration;

(4) the ultimate holding company of the respondent Everest Estate Property Group Limited is still under external administration pursuant to a deed of company arrangement dated 21 September 2007;

(5) that the deed of company arrangement which applied to the respondent and to the Estate Property Group Pty Limited and associated companies was so that the Estate Property Group of Companies and the respondent would not go into liquidation, but the property of the Estate Property Group of Companies could continue to be developed, and that all creditors of Estate Property Group Limited and the Estate Property Group of Companies would be paid from a single fund of $7.9m;

(6) that the respondent if required to repay the bank guarantee or any part thereof was likely not to have any assets or means to make such repayment; [and]

(7) the respondent elected not to put forward any evidence to the contrary of the above.

15 The written submissions of counsel for the appellant to the Tribunal dealt with this aspect of the matter as follows:

There is a lower risk of injustice in enjoining Everest from calling upon the bank undertaking if it should turn out that Brady is not successful because:

1. The sole shareholder of Everest, Estate Property Group Limited, is subject to a Deed of Company Arrangement:

2. The Deed of Company Arrangement suggests:

a) There is some form of standstill arrangement involving Becton to keep Everest and the related companies going:

b) The assets of Everest and other related companies are to be developed or sold in a manner to maximise the prospects that creditors of the group will receive a dividend in a winding up and to establish a single fund from which creditors of the group can be paid.

3. The property the subject of the Queens Road project and the Spencer Street project are subject to mortgages:

4. Becton has reported a deficiency of current assets to current liabilities and a net loss after tax;

5. The Independent Auditor’s Review report states that ‘there is significant uncertainty as to whether the company will continue as a going concern and, therefore, whether it will realise its assets and extinguish its liabilities in the normal course of business...’

16 In turn, the transcript makes clear that counsel for the appellant elaborated these submissions orally:

It would appear from the deed that all companies in the EPG Group are being supported by Becton, for some reason or another and that all assets in the group are being developed or sold in such a way as to maximise the return to creditors of the group. So that if Brady is ultimately successful in its claim in this proceeding, that there is no entitlement to call up the bank guarantee and an injunction is not granted today, Brady has to rely upon its right to claim liquidated damages against Everest, its going to stand in a pool with all other creditors and potentially not receive much, if any, return in respect of its damages claim...

[t]o the extent that Everest owns any property, its subject to a mortgage. All the apartments in the project have been sold. The parent company is subject – or the sole shareholder is subject to a deed of company arrangement under which it is compensated, but all assets in the group are going to be realised for the benefit of all creditors in that group. So there are significant issues in relation to the financial viability of the company at the moment and Brady ’s position in the future ...if it might be an unsecured creditor in the future...

17 Neither the written nor the oral submissions of Mr Morfuni who appeared for the respondent before the Tribunal, took issue with the proposition that the evidence relied on by the appellant raised the prospect of a real risk that if the guarantee were paid out and the appellant thereafter demonstrated it should not have been paid out, the appellant would nevertheless be unable to recover the amount of the guarantee.

18 Indeed for reasons to which I shall come, a proper analysis of Mr Morfuni's submission to the Tribunal demonstrates that it was premised upon the fact of the existence of such a risk. Further, Mr Morfuni conceded at the outset of this morning’s hearing that ‘Clearly, on the evidence, there was a risk’. He agreed that he did not dispute before the Tribunal there was a risk, but put his case on a basis that the risk had to be evaluated in the context of the contractual arrangements between the parties.

19 In summary, it was not contested before the Tribunal, nor was it contested before me today, that the evidence disclosed the risk which I have described. The evidence before the Tribunal relating to this risk fell to be evaluated having regard to the fact that it related to matters directly within the knowledge of the respondent and only ascertainable to a certain degree by the appellant. In turn it was necessarily significant that the respondent failed first to contest that the case as to the existence of this risk, should be accepted, or secondly to call any evidence rebutting or explaining the material put forward on behalf of the appellant in respect of such risk.

20 In my view the Tribunal's reasons do not come to terms with the basis of the fundamental contention made to it in respect of the balance of convenience, namely the risk that if the injunction was not granted, and the bank guarantee was called up, the respondent would not be able subsequently to repay the bank guarantee or any part thereof if required to do so.

21 The Tribunal stated its conclusions with respect to the question of the balance of convenience at paras 19 to 22 of its decision:

I must next consider the “balance of convenience” as it is still conventionally called.

In my view the evidence on this was weak – particularly after I excluded para 12 and following from the Emmett affidavit sworn on 1 April 2009. I did that at the applicant’s request after opposition from the respondent.

At best, as the applicant’s typed submissions indicated, I was left only to speculate on this aspect of the case. For example, what can I make of the statement – “There is some form of standstill arrangement involving Becton to keep Everest and the related companies going”? This is hardly something on which I can place great reliance. What is “some form” of a standstill arrangement? Is it a contract or not? This is vague, imprecise and fetching. And why should I draw any adverse inference out of Everest’s failing to dispute its lack of capacity to pay, as was submitted I should? It is for the applicant to establish its case for injunctive relief. It is not for the respondent to help it along its way. The respondent does not have to do anything. And, if it does nothing, then so be it: I must still deal with what the applicant advances.

Speculation and suspicion are not enough for me to find the balance of convenience test has been satisfied. Or, that there is a lower risk of injustice in enjoining the respondent. A lower risk of injustice needs to be shown, in my view, by more than I was shown in this case. An injunction is a serious step to take – even though an undertaking to damages is given. I am not prepared to take that step on evidence lacking sufficient or proper probative strength.

22 The reasons do not advert to the substantive case put on behalf of the appellant in a way which identifies, (a) the nature of the appellant's fundamental contention, (b) the evidentiary basis on which it was put, (c) the fact that the appellant's evidence must be assessed in light of its capacity to adduce evidence with respect to the question in issue, or (d) the fact that the respondent's case did not join issue with the appellant in respect to the existence of the risk upon which the appellant founded its arguments.

23 It will not always be the case that a failure to advert to relevant considerations allows an inference to be drawn that a Tribunal has failed to have regard to them. The drawing of such an inference must always depend on a consideration of the reasons stated in the context of all the circumstances of the case.

24 Nevertheless, in the present case, I am satisfied it was not open to the Tribunal to conclude, as it did, that it was left ‘only to speculate on this aspect of the case’.

25 In turn I am satisfied that despite the assertion made at the outset of its decision of careful consideration of the affidavit materials before it, the inference should be drawn that the Tribunal did not have regard to the combined strength of the material considerations advanced on behalf of the appellant, establishing a strong prima facie case that if the guarantee were paid out, it could never be recovered thereafter, whatever might be the ultimate conclusion on the seriously triable issue concerning the enforceability of the guarantee.

26 The decision simply rejects the case as to risk as ‘speculative’. It does so in circumstances where both the basis of the appellant’s case in this respect and the inference of risk was uncontested. It does so in circumstances where, as Mr Morfuni concedes, the risk was clear on the evidence.

27 Mr Morfuni has submitted, nevertheless, that the Tribunal committed no error of law and exercised its discretion in a way open to it. I turn now to his submissions.

28 First, Mr Morfuni submitted that the appellant's case would mean the respondent could never have recourse to the guarantee because, having regard to the fact the respondent was in administration, there would always be a risk that if paid out, the guarantee could never be recovered thereafter. I pause to note that the underlying premise of this argument is the existence of the risk which the Tribunal failed to accept. I do not accept Mr Morfuni's submission. It is plain the owner could have recourse to the guarantee, unless it was seriously arguable that recourse to the guarantee was being sought other than in accordance with the terms of the contract.

29 In other words it is only if the builder could rely, in a seriously arguable fashion, on cl 42.9 of the construction contract, that there could be said to be a bar to recourse to the guarantee, in the manner suggested by Mr Morfuni.

30 The underlying dispute between the parties in the present case, which the Tribunal held gave rise to a seriously triable issue, was whether the amount claimed under the guarantee was due and payable under the contract. Self-evidently a like issue could arise in other cases, but if it did not arise then the builder would face real difficulty in avoiding the obligations under the contract with respect to the guarantee.

31 Mr Morfuni submitted secondly that the risk in issue was clearly evident at the date the respondent gave the guarantees under the contract. This is the same submission that was made to the Tribunal on the balance of convenience. It is expressed at para 41 of Mr Morfuni's written submission to this Court as follows:

Brady 's case on balance of convenience was that if the bank guarantee was called up by Everest and Everest was later required to repay the money, it would not have the capacity to do so.

That assertion has to be assessed in light of the facts that were before the Tribunal. Those facts disclosed that Brady was aware of the financial position of Everest prior to entering into the deed of variation of the contract. It chose to give the bank guarantees with such knowledge so that its position, on its own case, did not deteriorate from the date of entry into the variation and the hearing of its application. Brady was not in the usual position of a person who discovers at the last moment that the other contracting party is insolvent.

32 Mr Morfuni’s written submissions to the Tribunal as regards the balance of convenience were limited to two paragraphs.

It is submitted that the balance of convenience is in favour of the respondents. The contractual obligations were designed to deal with this situation.

Damages would be an adequate remedy.

33 In oral submission he pursued only the first of these propositions and stated:

Yes, but what they rely on, as I understand it, is look, on the material that we’ve filed, you should conclude that there is a real probability that if recourse is had to the security, we may not be able to get it back and the submission is this; in terms of prejudice in that sense, a party cannot be any better than he was at the time that he contracted. On the facts before you, the contracting party, Estate Mortgage was in receivership and, ultimately, its creditors, one of whom had to be the contractor who built the place, had to agree to the deed of company arrangement. From the agreement – from the date of agreement for the company arrangement, the contractor knew the state of financial health of the party with whom it was contracting and the state of financial health of the party who held the security.

It can’t now say “Look, recourse ought not to be had because the contracting party whom we knew was in financial difficulties at the time we agreed to the deed of company arrangement may not be in a position to return the funds.” That’s not prejudice because it hasn’t altered its position whatsoever, in that sense. Secondly, due to the extent that Becton is, ultimately, what might be called a financier for the conclusion of the construction project pursuant to the deed of company arrangement, its position, financial or otherwise, is irrelevant because the contractor never had any rights against Becton and never would.

And absent that, there is no other prejudice that’s shown and, indeed, the balance of convenience in our submission, is that what the contract provided ought to flow and the contract provided that in the event of a certification by the superintendent for payment in respect of liquidated damages being made, the risk fell with the contractor. It was obliged to pay and it should’ve paid. And because it didn’t pay, under the contract the principal is entitled to have recourse to the security and that’s where the balance of convenience lies. And it’s not – all of the other dressing up, in our submission that the materials indicate is simply designed to obfuscate more than illuminate what the true position is.

They have not been able to show anything new in terms of prejudice to what they already knew. It’s not a situation that Estate has deteriorated in financial health subsequently and, indeed, the variation of the contract indicates – if you Honour goes to it, you’ll see it was – the variation is dated 4 October 2007 and the deed of company arrangement is dated 17 September 2007. Now, it ill behoves an applicant for an injunction to come along and say “I am entitled to an injunction because I fear that if contractual rights are exercised by the other party, I wont be able to recoup money,” in a situation where it knew that was always the position.

And so we would submit that there is no prejudice displayed and in terms of the balance of convenience, the submission is it is convenient and it should be the case that the parties be held to their agreement. And here, in our submission, the agreement is clear The process is one of risk allocation and under that system, the risk falls with whichever party the superintendent certifies owes money to the other. In this case, the certification is that the contractor owes money to the principal and that ought to be the status quo or balance of convenience that should be preserved until – if the contractor wants to litigate, it litigates.

34 Mr Morfuni’s subsequently referred to the argument further in oral submission to the Tribunal:

On the making of the deed of company arrangement, it [the appellant] knew the position that security had been given and was held and that there were, in fact – well, maybe there was a risk of the company that had been placed in receivership may not have been able to repay money.

35 The argument put to the Tribunal and reiterated in oral argument to me today was thus that because the contract was entered into when the respondent was already a party to a scheme of arrangement, the builder must always be taken to have known that if the guarantee were paid out, there was a real risk the moneys could not thereafter be recovered by it whatever its underlying entitlement. Once again I pause to note that this argument implicitly accepts the very risk which the Tribunal did not acknowledge in its reasons and which constitutes the underlying basis of the appellant's case on the balance of convenience.

36 Indeed the arguments for both sides proceeded before the Tribunal on the basis the relevant risk existed, yet the Tribunal resolved the question of the balance of convenience on the basis that it was not persuaded that the relevant risk existed.

37 Mr Morfuni's argument about acceptance of risk must itself be rejected because it again overlooks the fact that recourse to the guarantee is conditional upon the terms of the contract. The builder cannot be taken to have anticipated the owner would have recourse to the guarantee in breach of the terms of the contract. Whether that is what occurred in the present case remains to be determined. As the Tribunal held, it is the underlying seriously triable issue.

38 Thirdly Mr Morfuni submitted that the ‘highest case’ put by the appellant was that there was no evidence put on behalf of the respondent to show the guarantee could be repaid if it became necessary to do so. In truth the appellant relied on the failure of respondents to respond to material put on the appellant’s behalf, not simply upon a failure to call evidence. Further as I have said it was not contested before the Tribunal that the material put before it by the appellant raised the real prospect of the risk upon which the appellant relied.

39 In this context, and having regard to the nature of the evidentiary issue, namely that it was one relating to matters peculiarly within the knowledge of the respondent, the appellant was entirely justified in relying upon the fact that no answering material was put forward on behalf of the respondent.

40 Fourthly Mr Morfuni submitted that there is less injustice in requiring people to comply with their contractual obligations than permitting them to breach them. This submission begs the question yet to be determined whether the respondent was entitled to call upon the guarantee under the terms of the contract or not.

41 Fifthly Mr Morfuni submitted that paras 19–22 of the Tribunal's reasons should not be read in isolation from the balance of the judgment. I accept this submission, but as I have sought to explain, the Tribunal's conclusions as to a seriously triable issue make its conclusion as to the balance of convenience critical to its decision.

42 Sixthly in elaboration of the previous submission Mr Morfuni placed particular reliance upon the statement in para 4 of the Tribunal's reasons that the Tribunal had carefully considered the affidavit materials and submissions of the parties together with the authorities upon which they relied. For the reasons I have set out above I do not accept that this general statement overcomes the fundamental inadequacy I have identified in the Tribunal's reasons with respect to the balance of convenience.

43 The Tribunal dismissed the appellant’s case as to risk as speculative when it was clear on the evidence there was a real risk of the type asserted. It did not proceed to address Mr Morfuni’s argument relating to contractual acceptance of risk (which for reasons I have explained was in any event misconceived). The Tribunal’s reasons with respect to the balance of convenience were not responsive to the case which was before it.

44 Seventhly, Mr Morfuni submitted that insofar as reliance is placed, or was placed by the appellant upon the principle stated in Jones v Dunkel, the Tribunal was not bound to draw an inference from the failure of the respondent to call evidence before it.

45 I accept that this submission correctly reflects the underlying legal principle, but in the present case, the inference in issue was not contested before the Tribunal. The inference was also a necessary premise to the principal argument which was advanced on behalf of the respondent in respect to the balance of convenience, and the inference was sought to be drawn in circumstances in which the evidentiary issue related to matters peculiarly within the knowledge of the respondent. Looked at in all the circumstances of the case, there was no proper basis to reject the inference.

46 Lastly, Mr Morfuni submitted to me that ultimately the Tribunal was entitled to exercise its discretion as it did. I accept the ultimate disposition of the matter involved the exercise of a judicial discretion, but for the reasons I have stated, the Tribunal's consideration of the basis of the exercise of that discretion has miscarried.

47 Accordingly, and subject to any submissions that counsel may wish to make to me, I propose to order as follows. First, that the appeal be allowed. Secondly, that the matter be remitted for further hearing in accordance with law by a differently constituted division of the Tribunal. Thirdly, that the injunction previously granted by this court be continued upon like undertakings to that previously given until varied by further order of this court or the Victorian Civil and Administrative Tribunal. Fourthly, that the respondent pay the appellant's costs of this proceeding, and fifthly, that the respondent be granted an indemnity certificate pursuant to s 4 of the Appeals Costs Act 1998.