Background
York Property Holdings Pty Ltd, as principal, engaged Tomkins Commercial & Industrial Builders Pty Ltd to construct a residential tower at Main Beach on the Gold Coast for $128.31 million. Tomkins provided two unconditional insurance bonds, each worth $3,207,750. After disputes arose, Tomkins purported to terminate the contract and left the site. York disputed the termination, affirmed the contract, took the remaining work out of Tomkins’ hands and engaged another contractor to complete it.
Before all of the remaining work was finished, the superintendent purported to certify under clause 39.6 that Tomkins owed York $17,522,623.56 for additional completion costs. York demanded payment and threatened recourse to the bonds. Tomkins obtained an interlocutory injunction restraining York from calling on them, with the primary judge reasoning that clause 39.6 did not permit interim certification before all work taken out of Tomkins’ hands had been completed. York appealed.
The Court’s Holding
The Court of Appeal allowed York’s appeal. Clause 5.2 permitted York to have recourse to security in respect of any claim to payment that it “may have or claims to have” against Tomkins under the contract. The words “claims to have” introduced a subjective element: York did not need to establish an objectively arguable or valid entitlement before calling on the security, provided it advanced in good faith an assertion that it had a claim for payment under the contract.
Tomkins did not allege that York’s claim based on the superintendent’s certificate was made in bad faith. It therefore failed to establish a prima facie case that York’s proposed recourse would breach a contractual restriction on calling the bonds. The Court did not finally decide whether clause 39.6 permitted interim certification, although it observed that York’s construction was not so unarguable as to impugn its good faith. The injunction application was dismissed, and Tomkins was ordered to pay the costs of both the application and the appeal.
Key Takeaways
- A security clause covering claims that a principal “claims to have” may permit recourse based on a good-faith contractual assertion without an objective determination that the underlying claim is arguable or valid.
- The precise wording of the security provision controls; authorities interpreting clauses triggered merely by a party having a “claim” or “entitlement” may not determine the meaning of broader language.
- A contractor seeking to restrain recourse must establish a prima facie breach of the contractual limitation on recourse. Tomkins could not do so because it did not challenge York’s good faith.
Why It Matters
The decision underscores that construction security allocates the risk of being out of pocket while the underlying dispute remains unresolved. Where the contract permits recourse for a claim the beneficiary “claims to have,” the contractor may bear that interim financial risk unless it can show bad faith or another contractual bar.
The judgment also separates the right to call security from the ultimate merits of the underlying payment dispute. York could proceed against the bonds even though the Court left unresolved whether the superintendent was contractually entitled to issue the interim certificate.