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If it pays to read the manual before assembling flat-pack furniture, a lesson mostly learned the hard way, it surely pays to think very carefully about the contractual conditions before calling a contractor’s performance bond. At least that is the take-out from the High Court decision in Hawkins Limited v Elizabeth Properties Limited.
Context
At issue was whether Hawkins Limited (Hawkins) was liable to pay Elizabeth Properties Limited (EPL) substantial liquidated damages for late completion of a Tauranga construction project. Hawkins disputed EPL’s claim on the grounds that EPL had not fully complied with the contractual preconditions relating to the performance bond.
After lengthy but unsuccessful settlement negotiations, Hawkins referred its liability for liquidated damages to adjudication. But in parallel, and before the adjudicator had rendered a decision, EPL took steps to call the performance bond supplied by Hawkins, on the basis that Hawkins had failed to pay any part of the liquidated damages EPL asserted were due.
The terms of the bond required any demand to be accompanied by a certificate from the Engineer stating that in his reasonable opinion, acting independently and impartially, the Contractor was in default of its obligations and had failed to remediate within a reasonable time of notice from the Principal.
EPL purported to “require” the Engineer to issue such a certificate. Hawkins resisted, asserting that it was not in breach and challenging both the Engineer’s capacity to determine an issue which turned on complex legal issues, and his ability to do so in the absence of comprehensive argument from the parties. Hawkins offered to supply the Engineer with the papers from the adjudication, if EPL would consent to that. EPL declined. The Engineer issued the certificate.
Hawkins sought an interim injunction restraining EPL’s call on the bond until after the adjudicator’s award was issued. It relied on the above points, most notably on the Engineer’s obligation to exercise reasonable judgement in issuing his certificate, and his inability to do so in the absence of information and argument on the issues raised in the adjudication. It also pointed to EPL’s obligation under the Contract to ensure that he discharged his obligations reasonably and fairly.
Outcome
The High Court granted the injunction, accepting that it was seriously arguable that the Engineer had issued the certificate in breach of his obligation to act reasonably in forming the opinion recorded in the certificate.
The subject matter of the dispute went to the root of the liquidated damages regime, as a matter of law. EPL’s refusal to permit access to the adjudication papers, the Engineer’s knowledge of that refusal, and the lack of any evidence of the basis for his opinion – in the certificate or otherwise – arguably meant that the Engineer could not have reasonably formed his opinion. The reputational risks to Hawkins of a call on its bond were such that the balance of convenience favoured the limited injunction sought.
On one level the judgment is an orthodox reminder that a Principal’s right to call on a Contractor’s bond must be exercised strictly in accordance with the contractual machinery.
More controversial, we suspect, will be the Court’s willingness to question the reasonableness of the Engineer’s certificate and conclude it was in effect a nullity for failing to comply with the requirements of the contract. An Engineer’s obligation is typically limited to acting fairly and impartially. Beyond that, an Engineer’s certificate is not typically procedurally invalid simply because the Engineer got it wrong or based his decision on incomplete or inaccurate information.
In this case, however, the Court was swayed by a combination of factors.
- The contract required the Engineer to state his “reasonable opinion” – indicating an “objective overlay” beyond the Engineer forming a fair and honest view.
- The dispute extended to the validity of the liquidated damages regime, rather than more typical subject-matter for Engineer certification.
- The specific context of this decision indicates that the Engineer should have, but did not, obtain sufficient information about the matters in dispute to form a reasonable view. In particular, the Engineer’s knowledge that there was a substantial dispute in adjudication, about which he was apparently not properly informed.
This last factor, in our view, was the most significant in the outcome. The Engineer’s certificate in this case failed to even mention the dispute over the validity of the liquidated damages regime, let alone express a view on it. The Court was clear that had the Engineer explicitly turned his mind to the question in the certificate and expressed a view, the outcome would likely have been different.
So while the mere presence of a dispute may not preclude a call on a bond, it also cannot be ignored. The Engineer should turn their mind to that dispute and its implications, and express a view on it when certifying.
And the moral remains, for all involved: read the manual. Carefully. Probably at least twice.
