Eddy Lau Constructions v Transdevelopment Enterprise [2004] NSWSC 273

The plaintiff is a contractor who entered into a contract with the defendant (“developer”) for the construction of certain home units. Pursuant to the contract, the plaintiff was required to provide two bank guarantees to the developer. The bank guarantees secured the performance of the contractor’s obligations under the contract.

One such obligation under the contract is for the contractor to comply with the requirements of all Acts of Parliaments, ordinances, regulations or by-laws of all competent authorities.

Under the Home Building Act 1989, section 92(1) provides that a person must not do residential building work (the construction of home units is a type of residential building work) under a contract unless:

(a) a contract of insurance that complies with this Act is in force in relation to that work in the name of the person who contracted to do the work, and

(b) a certificate of insurance evidencing the contract of insurance, in a form prescribed by the regulations, has been provided to the other party (or one of the other parties) to the contract.

However, because the contractor was not aware of this section, it did not obtain any insurance for the first seventeen days that it worked on the building site. When it subsequently took out insurance for the building work, did not operate retrospectively so as to cover the first seventeen days of work. Accordingly, the contract of insurance obtained was not one, which complied with the Act.

On this basis, the developer purported to terminate the contract as the contractor was in breach of a clause in the contract which required the contractor to comply with “the requirements of all Acts of Parliaments, ordinances, regulations or by-laws of all competent authorities”, as mentioned above.

The contractor commenced proceedings in the Supreme Court seeking damages for wrongful termination of the contract and for the return of the two bank guarantees.

Did the developer wrongfully terminate the contract?

Barrett J found that the Home Building Act did not impose a requirement on the contractor to obtain insurance after it had entered into the contract to build the home units. Rather, Barrett J construed the Act as prohibiting the contractor from entering into a contract without first obtaining insurance. Once the contract had been entered into, there was no requirement that a contract of insurance be obtained. As such, there was no requirement of the law with which the contractor had to comply and accordingly the contractor had not breached the clause requiring it to comply with “all Acts of Parliaments.”

The developer had therefore wrongfully terminated the contract, and this had amounted to a repudiation on the part of the developer. His Honour then found that the contractor had accepted this repudiation when it subsequently left the building site and removed its equipment, and thus bringing the contract to an end.

Can the contractor seek the return of the bank guarantees?

Barrett J notes that the only provisions of the contract envisaging release of the bank guarantees are provisions concerned with completion of the works by the contractor. This had never occurred because in his findings, the contract was repudiated by the developer and then terminated by the contractor accepting the repudiation while the works were in progress. There is accordingly no express provision of the contract to which the contractor can point as a source of any right to have the bank guarantees returned to it.

His Honour notes in paragraph 95 that:

In accordance with the parties’ bargain, the plaintiff [contractor] furnished the bank guarantees under a provision requiring it to “provide security for the due performance of his obligations under this Agreement”. 

The situation was thus, from the outset, one in which the defendant [developer] held the bank guarantees as “security” only, that is, on the footing that resort might be had to them should the plaintiff default in due performance of its obligations.

Since the contract has been terminated, there is no longer any contract that is capable of being the source of performance obligations on the part of the contractor. Furthermore, by holding that the contractor had not breached the clause of the contract, there is nothing for which the bank guarantees can stand as security. This is analogous to the situation of a mortgagor (i.e. a borrower) under the mortgage. Where the borrower has paid off the loan, there is no payment obligation in respect of which the mortgaged property is capable of standing as security. As such, the mortgage must be discharged.

Therefore, the guarantee must be returned to the contractor in this case. The right to have them returned was an equitable right to redeem that arose automatically at the termination of the contract, and arose regardless of any contractual provision to the contrary. 

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