You Get What You Give - Protecting Security Under Contracts
The recent decision of Icon Co (NSW) Pty Ltd v Australia Avenue Developments Pty Ltd  NSWSC 178 relating to the high profile Opal Towers construction is a wake up call to contractors of the need to be very careful when agreeing to any terms or conditions that amend the standard provisions regarding recourse to security. In short, the Courts will give effect to the ordinary and natural meaning of the words in such clauses and if they give wider rights to call on security, then the contractor will be unlikely to prevent such recourse.
Icon Co (NSW) Pty Ltd v Australia Avenue Developments Pty Ltd serves as a salutary reminder to all contractors that there are five key points which are crucial for contractors to consider when drafting and negotiating recourse to security clauses within their contracts:
Reasonable notice periods;
Certainty as to the ‘debt’ or other claims which gives right to a party to have recourse;
Whether recourse can extend to claims beyond the actual works;
What other clauses of the contract give rise to a right to have recourse; and
Whether recourse can extend to claims under other contracts with the same party.
Icon Co (NSW) Pty Ltd (Icon) acted as the builder and Australia Avenue Developments Pty Ltd (Australia Avenue) as the principal, in a design and construction contract (Contract) to orchestrate works for a high-rise residential and commercial development property known as ‘Opal Towers’.
Under the Contract, Icon was to provide security, being an unconditional and irrevocable bank guarantee in the sum of $3.9 million in exchange for the proper performance of its obligations to Australia Avenue (Bank Guarantee).
Australia Avenue sought to call upon the Bank Guarantee under the Contract due to it claiming that two security recourse events had occurred as a result of damage suffered (specifically, cracking) to various levels of the property. This damage required residents to be evacuated and resulted in Icon spending significant amounts on repairs and other issues.