Insights from Tomkins Commercial & Industrial Builders Pty Ltd v Pacific Diamond 88 Pty Ltd as trustee for the Pacific Diamond 88 Unit Trust [2024] QSC 321
This article considers when liquidated damages (or other claims) can be set off in a progress certificate against payment otherwise certified as owing to a contractor.
In light of the recent decision of the Queensland Supreme Court in Tomkins Commercial & Industrial Builders Pty Ltd v Pacific Diamond 88 Pty Ltd as trustee for the Pacific Diamond 88 Unit Trust (‘Tomkins‘), a Principal should ensure that the time for exercising a set-off right has actually arisen.
In an application to the Court, Tomkins (Contractor) sought declarations that Pacific Diamond (Principal):
- Did not have right to set off against moneys due from the Contractor to the Principal certified in a progress certificate under the contract;
- Did not have any right of recourse to security (given in the form of a bank guarantee) in respect of any amounts purportedly certified by the Superintendent as payable from the Contractor to the Principal in a notice of liquidated damages and progress certificate.
Separately, the Contractor sought an injunction restraining the Principal from having recourse to those guarantees pending the resolution of an arbitration commenced under the dispute resolution clause (cl) of the contract.
Set-off Rights in the Australian Standard
The right to set off is a typical provision in a construction contract. It generally entitles a principal to deduct from monies that would otherwise be owing to a contractor, amounts that have been certified as due and owing from a contractor to a principal.
The right to set-off amounts certified in a progress certificate can be found within cl 37 of an unamended AS4902. Cl 37.2 provides that a superintendent is to issue two certificates following receipt of a progress claim. The first, under cl 37.2(a), is the progress certificate evidencing the superintendent’s opinion of the money due from the principal to the contractor. The second, cl 37.2(b), is a certificate evidencing money due from the contractor to the principal (along with an assessment of retention money).
Set-off Rights in Tomkins
In Tomkins, the Court was tasked with considering where those set-off rights exist within an amended AS4902 and the timing of when set-offs can be made.
The contract in question had an unusual amendment. Cl 37.2 had been amended so that only one certificate was required to be given from the Superintendent, the progress certificate under cl 37.2(a) stating the amounts owing from the Principal to the Contractor. The corresponding certificate under cl 37.2(b), evidencing the amount due from the Contractor to the Principal, had been deleted.
The Court found the entitlement to set-off amounts from a progress certificate was ordinarily derived from cl 37.2(b), which had been deleted. Cl 37.2(b) created that right of set-off by providing that a certificate was to be issued stating amounts owing to the Principal from the Contractor. Cl 37.2 provided the right of set off, not cl 34.7 (the Liquidated Damages provision) as the Principal had argued.
Despite finding there was no contractual entitlement to set-off amounts owing to the Principal in a progress certificate, the construction of the contract did not result in a consequence in which the Principal was denied the right to set off completely.
The Court had regard to cl 37.4 of the contract, which provided for the final payment claim and the final certificate. In this clause, the Principal’s entitlement to set-off liquidated damages was found, and only at the issue of the final certificate was the Principal entitled to set-off amounts that would be otherwise owed to the Contractor.
The Principal alternatively contended that it had an equitable right of set-off, the equitable right was unaffected by the removal of cl 37.2(b), and if that entitlement to set-off was intended to be extinguished, then clear wording to that effect was necessary. The Court did not accept the submission and found that by the deletion of cl 37.2(b), the parties intended to remove the entitlement to set-off until the final certificate stage arose pursuant to cl 37.4.
As to the second declaration sought by the Contractor, the Court found that the Principal could not draw down on the bank guarantees to recover liquidated damages. As it had found the entitlement to set off liquidated damages did not arise until the final certificate was issued, it followed that the right to recourse did not arise immediately.
The Court also provided obiter on whether an injunction to prevent the recourse would have succeeded. Treston J would have favoured the grant of the injunction on the following basis that the:
- period of the injunction would be short as the project was coming towards the end of the construction works;
- right to the grant of an injunction was preserved by the construction contract in cl 42.4;
- extension of the bank guarantee, as offered by the Contractor, provided significant financial security to the Principal; and
- risk of the Contractor not being repaid is balanced against the security of the Principal (having been found likely to be a special-purpose vehicle for the project).
Practical Considerations
When exercising a right to set-off you should check carefully whether the time to do so has arisen. The intention might be for that set-off right to exist in responding to each month’s progress claim, but the terms of the contract may not actually reflect that. To the extent that a provision is ambiguous or susceptible of more than one meaning, the Court will consider prior negotiations to establish the background facts that were known to the parties and the subject matter of the contract. Should it be the intention of the parties that a performance bond is to operate as a risk allocation device, then that intention must be clearly expressed within the confines of the contract.
Not intended as legal advice. Read full disclaimer.
