Notification of Claims Parent Company Guarantees: Informal and Verbal Communications May Not Be Enough

December 9, 2016

Complex construction projects usually require complex contractual arrangements which can involve numerous interlocking commercial agreements. Such was the case with the Fortescue River Gas Pipeline project, which involved numerous contracts and deeds between four parties: Monadelphous (the builder), DDG, TEC and TransAlta, which was TEC’s parent company.

 

The builder claimed an EOT and delay costs under the construction contract, and also claimed against TransAlta pursuant to a parent company guarantee. In Monadelphous KT Pty Ltd v DDG Fortescue River Pty Ltd [2016] WASC 224, TransAlta sought an early summary dismissal of the claims under the guarantee by raising a number of arguments designed to show that the builder’s claims were “so obviously untenable that they cannot succeed at trial”. TransAlta’s arguments included that:

 

the guarantee had expired prior to the builder commencing the claim against TransAlta;

the builder had not satisfied notice requirements; and

the builder’s claim under the guarantee was time-barred by reference to the “underlying liabilities”.

 

Justice Martin quickly rejected TransAlta’s second and third arguments, as they were not so unarguable that the builder’s claims would be untenable at a full trial, so TransAlta was required to rely on its first argument. The key clauses of the guarantee were:

 

cl 2.7(a): TransAlta’s obligation under the guarantee “remains in full force until the final milestone payment is made” under the construction contract; and

cl 2.7(b): this clause contained an exception, which extended the life of the guarantee only if the builder “notified” TransAlta of a claim prior to expiry of the guarantee.

 

The final milestone payment was made on 6 May 2015, and some additional payments were made following minor rectification works in late May 2015. The builder did not formally commence its claims until March 2016, therefore it had to rely on the exception in cl 2.7(b). In this respect, Martin J was required to determine what “notified” meant when used in this clause, including whether the builder’s informal or verbal communications, made during site meetings, were sufficient.

 

The term “notified” was not defined in the parent company guarantee, however the “Miscellaneous” section of the guarantee stated that cl 7 of the underlying construction contract applied. That clause stated that “a notice… shall be in writing”, and Martin J accepted that this meant that “notified”, as used in cl 2.7(b) of the guarantee, required written notice.

 

Accordingly, the builder’s informal and verbal communications were insufficient and it was held that the builder had not “notified” TransAlta of the claim prior to the expiry of the guarantee. Even though the matter was not heard at full trial with full evidence, Martin J concluded that the builder’s claims under the guarantee were so untenable that a full trial was not required. The builder’s claims were summarily dismissed.

 

As this decision was made in the context of notice required under a parent company guarantee, it will be interesting to observe the extent to which this approach is adopted in the context of construction contracts.

 

The full decision can be read here.

 

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