Security’s Commercial Purpose is Key to Principal’s Right to Call on Builder’s Security Bond
April 1, 2021
The recent Supreme Court of Tasmania decision of Hansen Yuncken Pty Ltd v Parliament Square Hobart Landowner Pty Ltd  TASSC 7 considered a Principal’s entitlement to call on the Builder’s security bond.
Parliament Square Hobart Landowner Pty Ltd (the Principal) engaged Hansen Yuncken to construct a stage of the Parliament Square development in Hobart. Under the Contract, Hansen Yuncken was required to provide a ‘Defects Bond’ as security for the Defects Liability Period.
During the Defects Liability Period the Principal levied liquidated damages due to delay in achieving Practical Completion. Liquidated damages were certified as being payable under the Contract, and the Principal made demand for payment from Hansen Yuncken.
Hansen Yuncken denied liability and requested the Principal provide an undertaking that it would not seek to draw down the Defects Bond in order to satisfy the alleged liquidated damages liability. The Principal refused to do so, and Hansen Yuncken commenced proceedings seeking, among other things, a declaration that the Principal had no entitlement to have recourse to the Defects Bond.
In determining whether the Principal had a right to call on the Defects Bond, Brett J summarised the considerations which will apply:
- The court first must determine the intended commercial purpose of the security. Specifically, whether it is to provide security for the builder’s performance of its obligations, or to operate as a risk allocation mechanism to ensure the party benefiting from the security will not be out of pocket pending the resolution of a dispute.
- Generally, if the commercial purpose of the security is to allocate risk, the principal is entitled to have recourse to the security, notwithstanding the existence of a dispute between the parties.
- The form of the security is key to determining the intended commercial purpose. For an unconditional and irrevocable security, the court will prevent recourse to the security in limited circumstances, being in the case of fraud, to prevent unconscionable conduct, or where to do so would contravene a negative stipulation contained in the contract.
The Defects Bond provided under the Contract was an “irrevocable, unconditional guarantee” in the form of a bank guarantee. In accordance with the Contract, it was in a form such that the bank unconditionally undertook to pay on demand any sum or sums which may from time to time be demanded by the Principal, up to a maximum aggregate sum specified in the undertaking, notwithstanding any objection by Hansen Yuncken.
The Court held that:
- the form of the Defects Bond as an irrevocable and unconditional bank guarantee made clear that the intended purpose of the Defects Bond was to serve a risk allocation function;
- in particular, the Defects Bond was intended to be available to the Principal in the event of a bona fide dispute arising between the parties during the Defects Liability Period; and
- the Principal was entitled to have recourse to the Defects Bond to satisfy the Principal’s entitlement to levy, and the Builder’s liability to pay, liquidated damages.
The full decision can be found here.