Burleigh Forest Estate Management Pty Ltd v Cigna Insurance Australia Ltd [1991] QSCFC 114 [1992] 2 Qd R 54

IN THE SUPREME COURT OF QUEENSLAND FULL COURT Writ No. 717 of 1991 BETWEEN : BURLEIGH FOREST ESTATE MANAGEMENT PTY LTD Plaintiff AND: CIGNA INSURANCE AUSTRALIA LTD Defendant THOMAS J RYAN J MACKENZIE J Reasons for judgment delivered by Thomas J and Ryan JJ on 4th October 1991 . Mackenzie J agreeing with the reasons of Thomas J- All concurring as to the order. "DEMURRER ALLOWED AND JUDGMENT ENTERED FOR THE PLAINTIFF IN THE SUM OF $1,392,315.15 TOGETHER WITH INTEREST ON THAT SUM AT THE RATE OF 12 PER CENT PER ANNUM PURSUANT TO THE COMMON LAW , PRACTICE ACT FROM 4TH FEBRUARY 1991 TO THE DATE OF JUDGMENT. ORDER THAT THE DEFENDANT PAY THE PLAINTIFF'S COSTS OF THE ACTION (INCLUDING RESERVED COSTS) TO BE TAXED. FURTHER ORDER THAT THE DEFENDANT/RESPONDENT PAY THE PLAINTIFF/APPLICANT'S COSTS OF AND INCIDENTAL TO THE DEMURRER TO BE TAXED." [1991] QSCFC 114 -- 1 of 17 -- IN THE SUPREME COURT OF QUEENSLAND FULL COURT Before the Full Court Mr. Justice Thomas Mr. Justice Ryan Mr. Justice Mackenzie No. 717 of 1991 BETWEEN: BURLEIGH FOREST ESTATE MANAGEMENT PTY. LTD. (A.C.N. 010 662 647) Plaintiff AND: CIGNA INSURANCE AUSTRALIA LTD. Defendant REASONS FOR JUDGMENT - THOMAS J. Delivered the 4th day of October, 1991. CATCHWORDS: Bonds - Performance bond in building contract - Whether matters arising under building contract may be raised to avoid payment - Unconditional nature of premise to pay - Commercial certainty essential - No equitable rights under Trident (1988) 165 C.L.R. 107 - Wood Hall v. Pipeline Authority (1979) 141 C.L.R. 443 applied - Whether owner may be restrained from making demand. Counsel: P.M. Wolfe for plaintiff R.A. Perry for defendant Solicitors: Feez Ruthning for plaintiff Hopgood & Ganiiii for defendant Hearing date: 18th September, 1991. -- 2 of 17 -- IN THE SUPREME COURT OF QUEENSLAND FULL COURT No. 717 of 1991 BETWEEN: BURLEIGH FOREST ESTATE MANAGEMENT PTY. LTD. (A.C.N. 010 662 647) Plaintiff AND: CIGNA INSURANCE AUSTRALIA LTD. Defendant REASONS FOR JUDGMENT - THOMAS J. Delivered the 4th day of October, 1991. This action is based on three performance bonds issued by the defendant in favour of the plaintiff. They were issued in accordance with the familiar arrangement in building contracts whereby a builder avoids the deduction of retention moneys in exchange for arranging for the receipt of a bond in favour of the owner as security for due performance on the builder ' s part . The demurrer in this case raises the question whether the financier who issues an unconditional bond in favour of the owner may resist the owner ’ s demand by asserting matters arising under the building contract. / The bonds upon which the plaintiff sues are annexed to the reply, and for the purposes of these proceedings, the parties have agreed that those documents are the bonds upon which the plaintiff sues, and that their terms may be taken as admitted in the defence. The parties are also content to treat a somewhat ambiguous reference in the defence to "the -- 3 of 17 -- 2 demands made by the plaintiff" as an admission of the fact that the demands asserted in the statement of claim were made. The issues sought to be relied on by the defendant are set out in para. 3 of the defence which states "3. With respect to paragraphs 1, 2 and 3, the Defendant (a) Admits that it provided certain bonds to the Plaintiff consequent upon Bond Applications being made by Thiess Watkins (Constructions) Limited on or about the dates referred to therein; (b) Says that those Bonds were provided with respect to certain construction work to be undertaken by Thiess Watkins (Constructions) Limited for the Plaintiff pursuant to a written Contract between the Plaintiff and Thiess Watkins (Constructions) Limited; (c) Says that any demand made upon the Defendant for payment pursuant to the Bonds was, by reason of the provisions of the Contract between Thiess Watkins (Constructions) Limited and the Plaintiff required to be made consistently with the terms and provisions of that Contract; (d) Does not admit that the bonds were unconditional; (e) Does not admit that the demands made by the Plaintiff were made consistently with the terms and provisions of the Contract; (f) Denies liability under the bonds as alleged therein or at all ." To those allegations the plaintiff has demurred, claiming that the whole of the defence is bad in law. It will be noted immediately that the factual content of the defence is limited to the existence of a building contract between the plaintiff and the builder (who is not a party to this action) and the fact that the bonds were provided pursuant to that contract. So much is in any event apparent -- 4 of 17 -- 3 from the recitals in the bonds themselves. The allegation most relied upon by counsel for the defendant is para. 3(c), but that is essentially an allegation of a legal conclusion. It does not plead any terms of the building contract which are said to lead to that conclusion, and even if it did, it would be necessary for the defendant to demonstrate as a matter of law that the terms of such a contract are capable of affecting the prima facie unconditional requirements of the bond in favour of the plaintiff. The first matter is whether the building contract ("the underlying contract") affects the obligation of the financier to meet its unconditional promise in favour of the owner. The recitals in the bonds mention the existence of the building contract between the owner and the contractor, the fact that it provides for the retention of moneys by the owner, and that the owner has required the contractor to furnish a bond "as security for the faithful employment for the purpose of the contract of said moneys so released". The operative part of each bond is then in the following words : "... At the request of the contractor ... Cigna Insurance ... unconditionally undertake(s) to pay on demand any sum which may from time to time be demanded by (the plaintiff) up to a maximum of $623,635.00 ..." (This is the amount prescribed in the first bond). Whilst the expression of parts of the bond resembles Pidgin English, it does not reach the point where a court is unable to give it commercial efficacy. -- 5 of 17 -- 4 The present case is covered by the unanimous decision of the High Court in Wood Hall Ltd, v. The Pipeline Authority and Anor. (1979) 141 C.L.R. 443. This has been applied, with obvious approval quite apart from its binding force, in Hortico (Aust.) v. Energy Equipment Co. (Aust.) (1985) 1 N.S.W.L.R. 545, 550, 553-554. Wood Hall was concerned with bank guarantees for the performance of the contractor's work under a construction contract (the "performance guarantee"), and a bank guarantee in lieu of retention moneys (the "retention guarantee"). The following extracts from the judgments reveal the unanimous view that unconditional promises of this kind by a bank are not to be qualified by reference to the underlying contract which led to the creation of the bank's instrument. "In my opinion, there is no basis whatever upon which the unconditional nature of the Bank's promise to pay on demand can be qualified by reference to the terms of the contract between the contractor and the owner. Equally, there is no basis on which the owner's unqualified right at any time to demand payment by the Bank can be qualified by reference to the terms or purpose of that contract." (Per Barwick J. at p. 445). "With all respect to the careful argument of counsel, I am unable to accept this argument at either of its two crucial points. I cannot agree either that the guarantees, upon their proper construction, make the obligation of the Bank dependent upon the existence of circumstances which give the Authority, as against the contractor, a right to have recourse to the bank guarantees or that in the circumstances existing in the present case the Authority was acting in breach of its contract with the contractor in making the demands. By each of the bank guarantees, the Bank 'unconditionally' undertakes 'to pay on demand' the sum demanded up to the limit specified in the bank guarantee. To hold that the bank guarantees are conditional upon the making of a demand that conforms to the requirements of the contract between -- 6 of 17 -- 5 •the Authority and the contractor would of course be quite inconsistent with the express statement in the bank guarantees that the undertaking of the Bank is unconditional. To hold that the Bank should not pay on receiving a demand, but should be bound to enquire into the rights of the Authority and the contractor under a contract to which the Bank was not a party would be to depart from the ordinary meaning of the undertaking that the Bank is to pay on demand. It would be contrary to the settled rules governing the implication of terms in contracts to imply provisions that would contradict the ordinary meaning of the words of the bank guarantees in this way." (Per Gibbs J., with whom Mason J. agreed, at p. 451). "Their Honours were, with respect, entirely correct in their conclusion that none of the four guarantees is, by any process of implication or construction, to be deprived of the unqualified operation which its express words dictate. Not only does the clear, indeed empathic, language of these guarantees preclude the introduction of any such qualification: to introduce such a qualification would be to deprive them of the quality which gives them commercial currency. Once a document of this character ceases to be the equivalent of a cash payment, being instantly and unconditionally convertible to cash, it necessarily loses acceptability. Only so long as it is 'as good as cash 1 can it fulfil its useful purpose of affording to those to whom it is issued the advantages of cash while involving for those who procure its issue neither the loss of use of an equivalent money sum nor the interest charges which would be incurred if such a sum were to be borrowed for the purpose . Being 'as good as cash' in the eyes of those to whom it is issued is essential to its function." (Per Stephen J. at p. 457) "The appellant's contention that some implied condition qualified the undertakings has no merit; the undertakings were made 'unconditionally' . The documents created unconditional obligations to pay the sums' on demand." (Per Murphy J. at p. 461). A bond of the present kind is frequently described as a "performance guarantee" or a "performance bond" (cf. Bullen and Leake and Jacob's Precedents of Pleadings 12th ed., p. 279). Such bonds may take a variety of forms, and so may the underlying contract which causes them to be prepared and -- 7 of 17 -- 6 given. However the most familiar (of which the present case is an example) is an unconditional promise by a financial institution, at the request of an account party to provide a guarantee in favour of a beneficiary. The existence of the underlying contract is usually disclosed in the recitals, but the rights of the parties inter se under that contract are not made a condition of the bank's obligation to carry out its promise to the beneficiary. Obviously the settling of a final account between the two contracting parties, or the ascertainment of their rights may be a time-consuming process and the commercial certainty of the bond has been preferred by the parties . The approach of the High Court in Wood Hall is consonant with practice in the international community and in particular in the United Kingdom and the United States ( Edward Owen Engineering Ltd, v. Barclays Bank International Ltd. (1978) Q.B. 159, 170; I . E. Contractors Ltd . v . Llovds Bank PLC and Rafidain Bank (1990) 2 Ll.L.R. 496, 499, 501 , 503; Siporex v. Bangue Indosuez (1986) 2 Ll.L.R. 146, 158; Ellinger "Uses of Letters of Credit and Bank Guarantees in the Insurance Industry " (1978) 6 International Business Lawyer 604). Indeed in the United States, performance guarantees are described as "stand-by letters of credit". The characterisation of "performance guarantees" and recognition of the range of possible results according to the wording of the particular bond or guarantee, is usefully discussed in " Performance Guarantees" (Martin Coleman, 1990, Lloyds Maritime and Commercial Law Quarterly 223, 224, 228). The mere mention of -- 8 of 17 -- 7 the underlying contract and of the clauses therein which have led to the issuance of the guarantee by the financial institution are not enough to incorporate the contract or to make the bank's obligation to pay conditional upon the rights of the parties under that contract. "It is in the nature of such guarantees that defences available to the account party in the event of a contractual claim by the beneficiary are not available to the bank in respect of the claim under the guarantee. This is so even if under the underlying contract the account party would be entitled to refuse further performance." (Coleman (above) p. 224). One of the policy reasons underlying the court's refusal to tamper with the unconditional nature of such an instrument is the commercial desirability of a party being able to rely upon it being "as good as cash". This is mentioned by Stephen J. in Wood Hall. Other advantages are listed by Coleman. "First, the element of the contract price reflecting the cost of the security will be reduced because the bank is not required to expend time and resources investigating the validity of a claim. Nor does the bank run a high risk of becoming involved in litigation over an allegedly unjustified claim. Secondly, if contract performance is unsatisfactory, the beneficiary knows he will obtain immediate compensation without the need to resort to the courts or extensive negotiations. Even if there are . doubts about whether his claim would ultimately be upheld, the possession of funds pending ultimate resolution strengthens his negotiating position. The immediacy of the payment is of importance because without the guarantee there would be a real risk of the other contracting party delaying payment by alleging an unjustified demand. Thirdly, so long as the court accepts that the underlying contract is not directly relevant in respect of a claim under the guarantee, the beneficiary avoids the risk that a court will find that an honest demand was made unjustifiably." (p. 230). The position is that the financial institution, upon issuing the bond at the request of the account party, charges -- 9 of 17 -- 8 a very low rate of interest to that party. However that immediately converts to a commercial interest rate if and when the bank meets the obligation upon the demand of the beneficiary. The account party of course shares with the beneficiary the lower cost of this form of security. Performance bonds of this kind • are really a risk distributing device agreed upon by the principal contracting parties. Washington Constructions Company Ptv. Ltd, v. Westpac Banking Corporation (1983) 1 Qd.R. 179, 182, explains some of the practical consequences of providing such guarantees in lieu of retention funds in building contracts. They give the owner the right to control the movement of moneys, at the same time giving^ the builder the benefit of avoiding automatic withholding of substantial moneys in retention funds. Through this mechanism, in the vast majority of building contracts the builder gets the benefit of receiving moneys which would otherwise have been withheld. He gets this benefit for the price of the low interest that it costs to procure the issue of the guarantee. In cases where a serious dispute arises in relation to defects or other matters of contention, the owner will call up the guarantee and the builder will thereupon become liable for commercial interest thereon; but the builder will in any event still have the benefit of the higher payment under the contract, unmitigated by retention. Eventually litigation may settle the entitlements inter se of the builder and owner, and if the owner 1 s demand has been in breach of the owner ' s duties under -- 10 of 17 -- 9 the contract, the builder may obtain any consequential losses by way of damages. This is an entirely workable commercial arrangement, of benefit to owners and builders alike. The suggestion (made by counsel for the defendant) that the courts should invade this area through the - identification of an equitable entitlement framed upon judicial comments contained in Trident General Insurance Co. Ltd, v. McNiece Bros. Ptv. Ltd. (1988) 165 C.L.R. 107, 120-121, 145-148, 174 would in my view be a recipe for commercial chaos. In any event I do not read the comments in the above pages of Trident as implying that third party rights will be imported so as to halt the obligation to pay upon commercial instruments such as letters of credit, or performance bonds . Counsel for the defendant submitted that the terms of the * building contract were specifically incorporated by reference in the recital in the bond, and that the bond is collateral in substance. Perusal of the bond shows that the recitals are narrative only and that the promise to pay is expressly unconditional. The submission is unsound. It was further submitted that, depending upon the terms of the building contract, it might be possible for the builder to restrain the owner from calling for payment, for example if there has been a breach affecting the entitlement of the owner to call upon the retention money or its equivalent. That may well be so. As Mr. Coleman observes, the duty of the bank to pay and the right of the beneficiary to claim are not simply opposite sides of the same coin. The duty of the bank arises only -- 11 of 17 -- 10 under the unconditional bond. It has the burden to pay, with no burden of enquiry, or duty to third parties. On the other hand the right of the beneficiary to claim may ultimately depend upon the terms of the underlying contract, and the adverse party may have an equity .to restrain him from making such a demand (cf. Washington Constructions (above); Hortico (above) at p. 552; Coleman (above) at p. 240). In Totton Homes Ltd, v. Coleman Contractors Ltd. (1984) 28 B.L.R. 19, 26-27 Eveleigh L.J. remarked: "As between buyer and seller the underlying contract cannot be disregarded so readily. If the seller has lawfully avoided the contract prima facie, it seems to me he should be entitled to restrain the buyer from making use of the performance bond. Moreover in principle I do not think it possible to say that in no circumstances whatsoever, apart from fraud, will the court restrain the buyer. The facts of each case must be considered." Whilst such possibilities are readily conceded, examples of successful restraints are hard to find. I reject the submission that a purpose trust or a resulting trust may arise in the circumstances postulated. No question of third party rights or duty from the bank to protect the builder ’ s rights can arise here, because this is the very type of bond that the builder contemplated would be issued. For the reasons stated above it is in the builder's interest as w6ll as the owner's that it should be so. In my view the defendant's submissions in this matter are not only incorrect, they are at best hypothetical. Counsel for the defendant advanced his submissions upon the concession (or assertion) that his client had been unable to obtain a copy of the building contract or to ascertain any facts in \ -- 12 of 17 -- 11 relation to the dealings between the owner and the builder which might reveal their rights inter se. He advanced his submissions on the footing that if his submissions on the law where fairly arguable, the defendant should be granted pre-pleading discovery. He submitted that time should be extended for defence so that if and when appropriate facts emerged, they could be included in the defence. The submission fails at all levels. In the first place it is not the law that the payment of a bond of this kind is conditional upon matters arising under the underlying contract. The only recognised defence thereto would seem to be the bank's awareness of fraud at the time of proposed payment ( United City Merchants (Investments) Ltd, v. Roval Bank of Canada (The American Accord) (1983) A.C. 168; Gian Singh & Co. Ltd, v. Bancrue de 1' Indochine (1974) 1 W.L.R. 1234; Sztein v. Henry Schroder Banking Corp. (1941) 31 N.Y.S. 2d 631). In the second place no facts are pleaded capable of raising fraud, or even the defence upon which the defendant hopes ultimately to raise. In the third place, as there is no present basis for believing that any material facts exist, the exercise is a pure fishing expedition. Order 29 r. 10 provides: "Subject' to the power of amendment, when a demurrer to the whole of any pleading, so far as it relates to a separate cause of action, is allowed or overruled, the court shall give such judgment as to that cause of action as upon the pleadings, the successful party appears to be entitled to ..." There is no basis upon which the court should grant the defendant leave to replead. The demurrer should be allowed and there should be judgment for the plaintiff for -- 13 of 17 -- 12 $1,392,315.15 together with interest on that sum from '4th February, 1991 to the date of judgment under the Common Law Practice Act at the rate of 12 per cent together with costs of the action to be taxed. The defendant/respondent should pay the plaintiff/applicant ’s costs of and incidental to the demurrer to be taxed. -- 14 of 17 -- IN THE SUPREME COURT OF QUEENSLAND FULL COURT No. 717 of 1991 Before the Full Court Mr Justice Thomas Mr Justice Ryan Mr Justice Mackenzie BETWEEN: BURLEIGH FOREST ESTATE MANAGEMENT PTY . LTD. (A.C.N. 010 662 647) Plaintiff AND: CIGNA INSURANCE AUSTRALIA LTD. Defendant JUDGMENT - RYAN J. Delivered the Fourth day of October, 1991 Counsel P.M. Wolfe for Appellant R.A., Perry for Respondent Solicitors: Fees Ruthning, Solicitors for Appellant Hopgood & Ganim, Solicitors for Respondent Hearing Date: 18 September 1991. -- 15 of 17 -- IN THE SUPREME COURT OF QUEENSLAND FULL COURT No. 717 of 1991 BETWEEN : BURLEIGH FOREST ESTATE MANAGEMENT PTY . LTD. (A.C.N. 010 662 647) Plaintiff AND: CIGNA INSURANCE AUSTRALIA LTD. JUDGMENT - RYAN J. Defendant Delivered the Fourth day of October, 1991. I agree that for the reasons stated in the judgment of Thomas J. the demurrer should be allowed. The decision in Wood Hall Ltd, v. The Pipeline Authority and Anor. (1979) 141 C.L.R. 443 settles the matter against the defendant. The only comment I wish to make relates to the submission by counsel for the defendant based upon the statements in Trident General Insurance Co. Ltd, v. McNiell Bros Ptv. Ltd. (1987-1988) 165 C.L.R. 107, and Barclays Bank Ltd, v. Ouistclose Investments Ltd. [1948] A.C. 567. In the latter case, the issue was whether if a lender lends a sum of money to a borrower upon terms accepted by the borrower that it is to be applied for a specific / purpose, the borrower is subject to an equitable obligation to apply the money only for that purpose. It was held that the arrangement in question for payment of a person's creditors by a lender gave rise to a relationship of a fiduciary character or trust in favour of the creditors, and if that trust failed, of the lender. The fact that the transaction was one of loan giving -- 16 of 17 -- 2 rise to a legal action of debt did not exclude the implication of a trust enforceable in equity. There is no analogy between the situation considered in that case and that in the present case. There is no basis in this case for saying that the money payable under the bonds was to be received by the plaintiff under an obligation to apply it for a specific purpose, such that it was under a fiduciary obligation to apply it for that purpose. In the Trident case, an insurer under a public liability insurance policy agreed to indemnify a company against all sums which it should become liable to pay • in respect of injury to persons at specified building sites. "The insured" was defined to include the company ' s contractors. A person who was injured as a result of the negligence of one of the company's contractors, which was not a contractor when the policy issued, recovered damage against the contractor. It was held by a majority of the Court that the contractor was entitled to enforce the indemnity against its liability to pay the damages. The reasons given by members of the High Court for reaching that conclusion were diverse, but nothing in them leads to the conclusion that a third party who is not identified as a person intended to be benefited by a contract is entitled to sue upon it. In my opinion the Trident decision is inapplicable to afford the defendant any relief. -- 17 of 17 --