China Construction Bank (New Zealand) has been ordered to pay out on a 'principal's bond' after a contractor working for one of the developers of the Scott Point special housing area in Hobsonville, Auckland, won summary judgment in the High Court.
A 'principal's bond' is the opposite of the 'performance bonds' typically provided by contractors in the construction industry to give their clients some confidence they will complete their contract as agreed.
In this case, the contractor Rohits Civil & Infrastructure (RCIL) sought the $600,000 bond to ensure its client, Clark Road Developments, would pay for the work done.
In ruling that the bond was payable on demand and had to be paid without regard to whether the client was in default, High Court Justice Matthew Muir cited case law that such a bond "is to be treated as in substance a promissory note" and puts an obligation on the bank that's "entirely independent of the ultimate contract between the account party and the beneficiary."
The ruling has prompted a warning from Civil Contractors New Zealand, which represents more than 600 civil engineering, construction and general contracting firms, that both contractors and their clients need to be careful in their choice of bond and its terms and conditions.
CCNZ chief executive Peter Silcock said such bonds were likely to become more common since the Construction Contracts Act was amended to ensure any retention monies are held in trust rather than by the client.
That change was made in the wake of the collapse of Mainzeal, which went into liquidation with some $20 million of retention payments that had been held back from contractors pending satisfactory completion of work. Because of the failure the contractors never got that money.
"Now the retention money must be held in trust but a number of clients said that's quite difficult for us to do," Silcock said. "So one of the things they are looking at is having a bond."
According to Justice Muir's November 20 judgment, RCIL had complained that Clark Road was late in meeting 13 of 19 progress payment claims for work on the subdivision at 165 Clark Rd and in two instances payment cheques were dishonoured.
On that basis, RCIL ceased work and made a call on the bond, while in turn, Clark Road purported to cancel the contract - a move RCIL deemed invalid.
China Construction Bank (CCB) declined to honour the bond on the basis it was null and void and Clark Road sought an injunction to prevent RCIL calling the bond.
The parties didn't agree on how much was owed under the contract and the engineer, who signed off on progress payments, certified an overpayment of $413,831 had been made, while RCIL argued it was owed about $574,000 including retentions and had claims for loss of profits, income and costs of about $2m against the $7.7m contract.
But Justice Muir found that those disputes were irrelevant when it came to the bond, which he deemed to have been payable on-demand unless the contract had been completed or there was fraud involved.
Rohits managing director Rohit Chand told BusinessDesk he had terminated the contract and called the bond because the slow progress payments had made him worried the client was in trouble and there was a risk a liquidator might have seized his firm's machinery if it remained on site.
He had taken up the offer of advice from law firm Kensington Swan, which is an associate member of the Contractors Association and provides advice on that basis.