Declaration of interest: CBP Lawyers acted for Beyfield Pty Ltd in the case discussed in this article.
In brief - Recourse to security or retention money must comply with section 67J
In the recent Queensland Supreme Court decision of Beyfield v Northbuild Construction Sunshine Coast, the court found that a party attempting to have recourse to security or retention money under a construction contract must strictly comply with section 67J of the Queensland Building and Construction Commission Act 1991 ("the Act") and that any attempt to contract out of those requirements was void.
Debts due under the contract vs. unliquidated claims for damages
The court determined that in most cases, contracting parties to building contracts in Queensland may only have recourse to security or retention monies under the contract to recover "debts due" under the contract and not unliquidated claims for damages, and only if they give notice of their intention to have recourse to the security or retention monies within 28 days after they became aware, or ought to have reasonably become aware, of their right to obtain the amount owed.
The court also confirmed that claims sought to be relied upon to convert security or retention monies under construction contracts must be genuine and bone fide, in the sense that they are not "specious, fanciful or untenable".
Section 67J of the Queensland Building and Construction Commission Act 1991
The decision dealt with the peculiarly worded section 67J of the Act, which says:
(1) The contracting party for a building contract may use a security or retention amount, in whole or in part, to obtain an amount owed under the contract, only if the contracting party has given notice in writing to the contracted party advising of the proposed use and of the amount owed.
(2) The notice must be given within 28 days after the contracting party becomes aware, or ought reasonably to have become aware, of the contracting party’s right to obtain the amount owed.
"Amount owed" is defined as "a debt due from the contracted party for the contract to the contracting party for the contract because of circumstances associated with the contracted party’s performance of the contract".
Section 67E of the Act provides that any term of a building contract which is inconsistent with section 67J is void to the extent of the inconsistency.
Subcontractor seeks injunction to prevent head builder from having recourse to bank guarantees
In Beyfield Pty Ltd v Northbuild Construction Sunshine Coast Pty Ltd [2014] QSC 12, the subcontractor, Beyfield, sought an injunction to prevent the head builder, Northbuild, from having recourse to two bank guarantees provided by Beyfield as security under the subcontract to recover damages alleged to be owed by Beyfield for its alleged breaches of the subcontract.
Clause 5 of the subcontract purported to allow Northbuild, upon written notice, to have recourse to the bank guarantees "in respect of any claim to payment (liquidated or otherwise) the builder may have against the subcontractor under the subcontract or otherwise".
Northbuild had not given notice of its intention to have recourse to the bank guarantees within 28 days of when the damages claims were alleged to have arisen as required by the Act, and instead only gave the written notice under clause 5 of the subcontract.
Subcontractor argues that subcontract inconsistent with section 67J
Beyfield denied liability for Northbuild’s claims, and argued that clause 5 of the subcontract was inconsistent with section 67J of the Act and therefore void because:
• it allowed Northbuild to have recourse to the bank guarantees in respect of unliquidated claims for damages, arising under the contract or otherwise, rather than "amounts owed" (as that term is defined in the Act); and
• it allowed Northbuild to have recourse to the bank guarantees without giving notice to Beyfield within 28 days after Northbuild became aware, or ought to have become aware, of its right to obtain the amount claimed.
Builder argues it was not required to give notice before converting security for unliquidated claims for damages
On the other hand, Northbuild argued that section 67J only applied to "amounts owed" (as that term is defined in the Act) and not to unliquidated claims for damages, and therefore does not affect clause 5 of the subcontract or Northbuild’s right to have recourse to the bank guarantees in respect of its damages claims (even though it did not give notice of its intention to have recourse to the bank guarantees within 28 days from when the claims arose).
That is, Northbuild argued that there was nothing in the language of section 67J of the Act to justify holding that it set out the only circumstance in which a security can be converted. Northbuild argued that it would be required to give notice of its intention to convert the security in respect of an "amount owed" within 28 days of becoming aware of its right to the claim, but was not required to give notice (other than required by clause 5 of the subcontract) before converting the security for its unliquidated claims for damages because they were not "amounts owed".
Court finds that subcontract void due to inconsistency with Act
The court acknowledged the ambiguity in the wording of section 67J, but in interpreting the ambiguity considered the objects of the Act (set out in section 3 of the Act and the Explanatory Notes), which included the regulation of the building industry and the limiting scope of set-offs available to contracting parties.
The court held that:
• the effect of section 67J is that a contracting party may only have recourse to a security under the contract in respect of an "amount owed" under the contract (i.e. a liquidated debt), and not unliquidated claims for damages, and only if the contracting party gives notice of its intention to have recourse to the security within 28 days after it became aware, or ought to have reasonably become aware, of its right to obtain the amount owed; and
• section 5 of the subcontract was void to the extent that it was inconsistent with section 67J of the Act and Northbuild was not entitled to have recourse to the bank guarantees to recover its unliquidated claims for damages for breach of contract.
Builder's damages claims found not to be genuine
The court also found that Northbuild’s damages claims were not genuine, and was prepared to intervene on grounds other than under section 67J of the Act. In doing so, the court applied the NSW Supreme Court decision of FMT Aircraft Gate Support Systems v Sydney Ports Corporation [2010] NSWSC 1108, which held that the appropriate test for determining whether a claim can be relied upon to convert security under a building contract is whether the claim would be liable to be summarily dismissed in court proceedings.
Supreme Court's decision consistent with objects of Queensland Building and Construction Commission Act
The court’s interpretation of section 67J of the Act is clearly consistent with the objects of the Act and provided for a sensible outcome.
Northbuild’s interpretation would have meant that there were strict limitations on contracting parties’ rights to have recourse to security for liquidated debts, but no regulation whatsoever on their right to have recourse to security for unliquidated damages claims for breach of contract.
That was clearly not the intention of parliament when it enacted section 67J (although it is drafted fairly poorly).
Seeking recourse to bank guarantee or retention money in respect of a claim under a contract
Any contracting party seeking to have recourse to a bank guarantee or retention money in respect of a claim under a contract must first ensure that the claim is a "debt due", and should ensure that their contracts provide mechanisms for unliquidated claims for damages for breach of contract to be converted into liquidated "debts due" (for example, by way of certification by the superintendent).
For jurisdictions outside of Queensland, the claim relied on must be at least genuine or "arguable", in the sense that it could resist an application to have it summarily dismissed in court proceedings (even though the claim may be subject to a genuine dispute).
Section 67J of the Act does not apply if:
• work has been taken out of the hands of the contracted party;
• the contract has been terminated; or
• if the security or retention amount is to be used to make a payment into court to satisfy a claim under the Subcontractors' Charges Act 1974.