The bond stacks up

In the recent case of Richina Pacific Ltd v Samson Corporation Ltd [2018] NZCA 132, the Court of Appeal has confirmed a principal can call on a performance bond if the contractor has not fully discharged its contractual obligations, even if a certificate of practical completion has been issued.

Background

In 2010 Samson Corporation Limited (Samson) contracted Mainzeal Construction Limited (Mainzeal) under a NZS3910:2003 form of contract to construct a commercial building complex in Parnell. The contract price of approximately $37 million included a provisional sum of $5.1 million for an automated car stacker for use in the basement parking area.

Mainzeal was required to provide a $2 million performance bond to Samson under the contract. Mainzeal procured a bond from AAI Limited (AAI) and Mainzeal’s parent company, Richina Pacific Limited (Richina), agreed to indemnify AAI should the bond become payable.

A practical completion certificate was issued for the contract works with the exception of certain listed items, one of which was the car stacker. The certificate stated that the bond would not be released until the listed items were completed.

Mainzeal went into receivership before the car stacker reached the contractual performance standard. Samson called on the bond.

High Court decision

Richina commenced proceedings in the High Court seeking a declaratory judgment that the bond was null and void or otherwise unenforceable. Samson filed a cross-claim against AAI for the full value of the bond.

Richina argued, and the Court agreed, that the bond was conditional upon Mainzeal failing to perform its contractual obligations and Samson suffering loss as a result.

The High Court decided the bond was payable as Mainzeal’s failure to complete the car stacker meant it had not performed its contractual obligations. As Samson could show it suffered close to $3 million in losses, it was entitled to claim the full $2 million bond.

For an overview of the High Court decision, read our article here.

Court of Appeal decision

Richina and AAI jointly appealed to the Court of Appeal. The main question on appeal was whether the bond was discharged upon issue of the certificate of practical completion.

In the alternative, the appellants argued that the bond was discharged because AAI was disadvantaged by Samson gaining possession of the site early and paying retentions. Richina and AAI argued these actions were not permitted by the contract and went beyond the scope of an indulgence clause in the bond. This clause provided that the surety would not be released from liability under the bond by (i) any change to the contract terms, (ii) alteration to the contract works, (iii) any time allowance, or (iv) forbearance or waiver by Samson or the engineer.

These arguments are summarised below.

Discharge of bond by issue of the practical completion certificate

The Court interpreted the terms of the bond as being “null and void” if, upon practical completion, Mainzeal had performed all of its contractual obligations.

As stated above, the engineer issued a certificate of practical completion which expressly excluded the car stacker. However, AAI and Richina argued the issue of the practical completion certificate was sufficient to discharge its obligations under the bond.

The Court of Appeal dismissed this argument, agreeing with the High Court that the bond could only be discharged upon the fulfilment of all of Mainzeal’s contractual obligations (which included finishing the car stacker), not upon the issuing of a completion certificate. It dismissed an argument that the car stacker was to be treated as deferred works excused from practical completion. The completion certificate clearly excluded the car stacker and Mainzeal’s actions thereafter indicated it was still required to meet its performance obligations in respect of the car stacker to achieve practical completion.

Discharge of bond by possession

In reliance on a general legal principle, the appellants argued that AAI was discharged from liability due to Samson’s conduct which deviated from the contractual obligations being guaranteed and which was prejudicial to AAI’s interests. The appellants argued the indulgence clause should not apply in such circumstances.

The prejudicial conduct Richina and AAI relied upon in support of their argument was the contractual parties’ arrangement permitting Samson to regain possession of the site and the resultant retentions payment (which the appellants said was premature).

Although the Court of Appeal preferred a different interpretation to the High Court, it reached the same conclusion on this argument. By expressly agreeing to defer practical completion for the car stacker, and certify completion for the remainder of the works, the two were being treated as separable portions.

Although this term was not used by the parties, this behaviour was expressly permitted by the contract and therefore the indulgence clause was not engaged. Accordingly, the question of prejudice to AAI did not arise.

Discharge of bond by payment of retentions

Richina and AAI argued they were further prejudiced by Samson’s payment of 20% of the total retention sum to Mainzeal, following issue of the practical completion certificate. The appellants argued that Samson was under no legal obligation to pay retentions prior to completion of the car stacker.

The Court of Appeal again disagreed with the appellants. The Court held that the retention payment was not voluntary but part of Samson’s obligations under the contract. Therefore, the act of payment could not discharge the bond. As a result the Court of Appeal did not need to consider whether the payment caused prejudice to AAI.

Take home message

This case demonstrates the reliability of bonds in protecting a principal against the non-performance or default of a contractor. In upholding the High Court’s decision, the Court of Appeal showed a willingness to strictly construe the terms of a conditional bond.

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