BuildLaw Issue 38 December 2019 | Page 16

Construction bonds - why releasing can be far from simple
By James Dow & Katie Shorter
The importance of having clear provisions in construction contracts regarding the circumstances where a Principal may call up a contractor’s bond was highlighted in the recent High Court decision of Arrow International (NZ) Limited (in liq) & Ors v NZ Project 29 Limited & AAI Limited (formerly Vero) [2019] NZHC 1326. The case involved an application made by contractor Arrow International (NZ) Limited (in liquidation) (Arrow) to extend an interim injunction that prevented AAI Ltd (Vero) from making payment to NZ Project 29 Ltd (Project 29) under a construction bond (Bond).
Key Facts
The Bond was issued by Vero in favour of Project 29 in association with a construction contract between Arrow and Project 29 for a property at 89 Courtney Place, Wellington (Contract). During construction, Arrow went into voluntary administration, causing construction works to cease. Project 29 then exercised its “step-in” right under the Contract to assume control of the works and resume possession of the construction site. Once Project 29 had resumed possession of the site, it exercised its right under the Contract to withhold further payments to Arrow and call on the Bond.
Arrow and its liquidators disputed that the claims made by Project 29 under the Bond were legitimate. Arrow applied to the High Court for orders to extend the interim injunction granted by the Court the month prior that prevented Vero from making payment to Project 29 under the Bond.
Decision
The Bond was conditional both via the Contract and the Bond itself. The Contract contained a clause providing that the Engineer was required to certify that Arrow had breached the Contract and then make a provisional assessment of all amounts that may become owing to Project 29 by Arrow, before Project 29 was able to make a call on the Bond.
Arrow argued that the clause contemplates the Engineer making an assessment of the amount Project 29 would have paid to Arrow had Arrow completed the works under the Contract, against the amount Project 29 would have to pay to complete the works following Arrow’s default. However, there was no calculation of such costs in the spreadsheet provided by the Engineer. The Court accepted this argument and found that without a direct assessment of the cost to complete the Contract works, the Engineer had not issued the certificate in accordance with the terms of the Contract.
The Bond also contained a clause that reinforced the obligations of the Engineer as a condition of a demand by Project 29 under the Bond. The clause stated that demand by Project 29 for the Bond must be accompanied by a certificate from the Engineer which certified that Arrow was in default under the Contract and that “the sum demanded is in the opinion of the Engineer reasonable having regards to the nature and consequence of the default”.
The Court took issue with the Engineer’s certification that the sum demanded by Project 29