Engineer under spotlight

Rebecca Saunders, Partner, Wynn Williams’ Construction Team and George Sutton, law graduate, Wynn Williams.

The recent decision of Hawkins Limited v Elizabeth Properties Ltd confirms that a Court will consider the basis of any Engineer’s Certificate, and any dispute under the underlying contract, in determining whether a party may make a call on the bond, even when the bond is expressed as being unconditional.

Hawkins Limited and Elizabeth Properties Ltd entered into a contract for construction for the development of a mixed commercial and residential site, which would include close to 100 apartments, 23 luxury townhouses, and a food and drinks dining precinct. This was a sizeable contract worth close to $150 million.

The project was significantly delayed. A dispute arose in which the validity and applicability of liquidated damages (ie, damages that are included in a contract to compensate for a potential breach of the contract, as an estimate of the losses that one of the parties would suffer in case of a breach) were called into question.

Elizabeth Properties wrote to the Engineer to the Contract, claiming more than $20 million in liquidated damages, and resulting in the Engineer deducting this figure from Hawkins’ next payment claim.

To acquire these funds, Elizabeth Properties claimed access to the contractor’s bond under the contract. In response, Hawkins applied to the High Court for an interim injunction. The bond itself was worth $3 million.

Decision

The High Court granted the interim injunction sought by Hawkins, and determined that, on the facts, and following the decision in Commerce Commission v Viagogo AG [2019] NZCA 472, [2019] 3 NZLR 559, the application for injunction should involve a two-stage test: (a) “The first inquiry is whether there is a serious question to be tried. If [and only if ] that threshold is met, the court moves on to consider… (b) whether the balance of convenience favours granting or refusing relief.”

The High Court held that there was a serious question to be tried with respect to Elizabeth Properties’ right to call on the contractor’s bond. This is despite the fact that the bond was expressed as being “unconditional” in favour of the Principal. In addition, the High Court held that the balance of convenience favoured the granting of the injunction.

Significantly, the condition which the Court found prevented Elizabeth Properties from claiming the bond was the Engineer to the Contract having to act reasonably and in good faith.

Comment

This is a harsh decision in our view: the reasonableness of the Engineer in issuing an Engineer’s Certificate is not an enquiry we would expect the Court to make in circumstances where the Principal has the benefit of an unconditional bond.

The UK courts have grappled with this issue previously, with Rebecca Saunders acting for the successful contractor in the decision of Simon Carves v Ensus UK Limited [2011] EWHC 657 (TCC) while working in London. In that case, the court restrained a call on an on-demand bond by reference to the underlying contract.

However, it has since been regarded as turning on its own facts.

It is worth noting that this decision, while restraining Elizabeth Properties’ ability to immediately recoup its alleged losses, does not reflect the final opinion of the Court with respect to the validity of the liquidated damages regime in the contract.

This ruling does increase the requirements on Engineers to the Contract, who must somehow establish that they have acted reasonably when issuing a Certificate.

Interestingly, neither party sought to defer the dispute to Arbitration, noting that NZS 3910 contains an arbitration clause.

This was successfully argued by our team on behalf of a contractor client in the decision of Growing Spaces v Foundation Village [2023] NZHC 2638.

In light of this, it may be that any future proceedings concerning this project will be determined privately.