The High Court has issued a decision restraining a principal from calling on a $3 million contractor’s bond under a construction contract pending determination of a liquidated damages dispute (Hawkins Ltd v Elizabeth Properties Ltd [2024] NZHC 561).

It serves as a useful reminder that the terms of the contract and the bond are the primary considerations in determining whether a party can call on a bond, even where the bond is seemingly “unconditional”.

Facts

In August 2019 Elizabeth Properties Limited (EPL) and Hawkins Limited (Hawkins) entered into a construction contract, based on an amended NZS 3910:2013 standard form, under which Hawkins was to construct the Elizabeth Street Development in Tauranga. The contract had a fixed price of nearly $149 million. A dispute arose concerning EPL’s right to liquidated damages (LDs) under the contract and a subsequent reset agreement. Hawkins issued a notice of adjudication.

While the adjudication was ongoing, in January 2024 EPL wrote to the Engineer to Contract stating that it was due nearly $22.8 million in LDs. The Engineer made that deduction from Hawkins’ next payment claim. EPL also requested the Engineer to certify that, in his opinion, Hawkins was in default under the contract by failing to pay the LDs. The Engineer certified this.

Hawkins applied to the High Court for an interim injunction restraining EPL from calling on the bond.

Decision

The High Court granted the interim injunction, restraining EPL from calling on the bond pending the adjudicator’s determination of the LDs dispute. The Court determined the application using the traditional two-stage test:

1. Whether there was a serious question to be tried.
2. Whether the balance of convenience favoured granting interim relief.

On the first issue, the Court determined there was a serious question to be tried that EPL was not entitled to call on the bond. The Court considered that, for disputes as to the meaning of a contract, it was not appropriate to apply a more rigorous test than the orthodox “serious question to be tried” threshold, even in cases involving “unconditional” bonds. The Court made three points:

• The contract’s terms indicated an objective overlay. The Engineer’s opinion had to be “reasonable” and EPL had to ensure the Engineer acted “reasonably”. This was different from a clause “requiring” the Engineer to certify a breach, which would leave no room for the Engineer to exercise independent judgment.
• The dispute was not merely about whether Hawkins caused delays, it extended to whether LDs were payable at all on the proper interpretation of the contract and the reset agreement.
• The actions of EPL and the Engineer gave rise to a serious question that the Engineer did not form a reasonable opinion and EPL did not ensure the Engineer acted reasonably.

On the second issue, the Court determined the balance of convenience favoured granting relief until the adjudicator’s determination of the LDs dispute:

• The Court accepted Hawkins’ argument that calling on the bond would irreparably harm its reputation. Damages would therefore not be an adequate remedy.
• The Court considered that if the adjudicator determined EPL was entitled to the LDs, any prejudice to EPL resulting from delayed payment of the LDs could be addressed by limiting the term of the injunction to the date of the adjudicator’s determination.

The overall justice favoured restraining EPL from calling on the bond pending the adjudicator’s determination of the LDs dispute. The Court made an interim order to that effect.

Our view

The decision clarifies that the seemingly “unconditional” nature of a bond will be informed by the contract and bond terms when considering a principal’s entitlement to call on it. The terms may include pre-conditions for the bond to be called. At the drafting stage, parties should ensure the terms are clear as to the principal’s entitlement to access the security before any dispute between them is determined.

Principals seeking to call on bonds should ensure they strictly comply with any pre-conditions. Where an Engineer’s certificate of their reasonable opinion is a pre-condition, principals should take particular care to ensure the Engineer acts reasonably and in good faith (under clause 6.1 NZS 3910:2013 or 3910:2023, if applicable). Failure to do so may invalidate a subsequent Engineer’s certificate and impact the principal’s entitlement to call on the bond.

For contractors, the decision reinforces the importance of the principal’s obligation to ensure the Engineer acts reasonably and in good faith. Actions by the principal that cause the Engineer to act on incomplete information, or purport to “instruct” or “require” the Engineer to take certain steps, may undermine this obligation. Further, if a contractor can tender cogent evidence of the reputational damage it will suffer if a bond is called, this can be a strong factor supporting the inadequacy of damages as a remedy and, accordingly, the balance of convenience favouring granting an injunction.

We note that the application was for an interim injunction rather than for interim measures under the Arbitration Act 1996. Where a contract contains an arbitration clause and a dispute arises under that contract, the High Court has held that parties cannot bring proceedings for interim relief outside the Act’s interim measures regime (Foundation Village Ltd v Growing Spaces Ltd  [2023] NZHC 2638; Clark Road Developments Ltd v Grande Meadow Developments Ltd  [2017] NZHC 2589). It is assumed this jurisdictional point was not raised by either party.

This article was co-authored by William Turner, Solicitor, and Oscar Read, Law Clerk, from our Construction and Infrastructure team.