N773

PAPUA NEW GUINEA
[NATIONAL COURT OF JUSTICE]

NATIONAL HOUSING COMMISSION

V

QUEENSLAND INSURANCE (PNG) LTD

Waigani
Bredmeyer J
25 July 1989
15 November 1989

GUARANTEE AND INDEMNITY - Contract of guarantee - What constitutes - Security deposit under construction contract - Whether guarantee - Unconditional promise to pay money on demand - Whether consideration - Not under seal.

BUILDING AND CONSTRUCTION CONTRACTS - Construction of - Security to be provided - Security deposit given by third party - Not under seal - No consideration given by constructing authority - Whether guarantee or unconditional promise to pay - Deposit not recoverable.

CONTRACT - Building and Construction Contracts - Security to be provided - Security deposit given by third party - Not under seal - No consideration given by constructing authority - Whether guarantee or unconditional promise to pay - Deposit not recoverable.

The National Housing Commission (the Commission), an independent statutory authority, awarded a construction contract to Pivot as contractor. One of the terms of the contract was that the contractor would provide security for the due performance of its obligations under the contract, which security could be in the form of cash, etc, or:

"a banker’s undertaking, insurance bond, insurance guarantee policy or other security (in all cases the form and provisions of the security to be approved by the Principal whose approval shall not be unreasonably withheld)".

The contractor supplied a document entitled "Security Deposit" addressed to the Independent State of Papua New Guinea under the hand of an officer of Queensland Insurance (PNG) Ltd and undertaking to pay to the State up to K18,290.75 unconditionally on demand. The contractor went into liquidation and the Commission demanded payment of K18,290.75 under the security deposit. In an action to recover this sum on the basis that the security deposit was a guarantee,

Held

(1) A contract of guarantee is a contract by which the guarantor agrees to be answerable for the debt, default or miscarriage of another person whose primary liability to a third person exists or is contemplated.

(2) The "security deposit" was no more than an unconditional promise to pay money on demand up to a stated maximum amount.

(3) Because the "security deposit" was not under seal and no consideration had been given by or moved from the Commission to Queensland Insurance, the Commission could not sue upon it.
Wood Hall Ltd v The Pipeline Authority (1979) 141 CLR 443; 53 ALJR 487; 24 ALR 385, considered.

Cases Cited

Wood Hall Ltd v The Pipeline Authority (1979) 141 CLR 443; 53 ALJR 487; 24 ALR 385.

Statement of Claim

This was an action to recover a sum of money allegedly due under a security deposit given pursuant to a construction contract.

Counsel

T Mann, for the plaintiff.
G Lay, for the defendant.
Cur adv vult

15 November 1989

BREDMEYER J: The plaintiff has sued the defendant upon a security deposit given by the defendant for the payment of K18,290.75. The defendant claims that it is not liable to pay because the document is not under seal and the plaintiff gave no consideration for it.

The security deposit arose out of a construction contract. On 7 January 1980, the plaintiff entered into a contract with Pivot (NG) Pty Ltd (hereinafter called Pivot) to construct roadworks, drainage, water supply and sewerage on the plaintiffs land at Gerehu for the sum of K879,074.15. Clause 4 of the contract required Pivot to provide security for the due performance of its obligations under the contract. The amount was fixed by a formula and came to K18,290.75. The clause dealing with the form of security is important and I quote from it:

"4.2 Form of Security. The Contractor may provide the security in the form of:

(a) cash, interest-bearing deposit, Government bonds or Government inscribed stock; or

(b) a banker’s undertaking, insurance bond, insurance guarantee policy or other security (in all cases the form and provisions of the security to be approved by the Principal whose approval shall not be unreasonably withhold)."

Pursuant to that clause Pivot obtained a document called a security deposit from Queensland Insurance which I quote in full.

"Security Deposit

Project-E80/94/007 Roadworks, Drainage and Water Supply

Gerehu 3B/2 — Policy No 4/50951

In consideration of The Independent State of Papua New Guinea (hereinafter called ‘the Principal’) at the request of pivot (ng) pty ltd (hereinafter called ‘the guarantor’:) agreeing to accept this undertaking in lieu of requiring the contractor to lodge with the Principal a security deposit of Eighteen Thousand Two Hundred and Ninety Kina and Seventy five Toea in accordance with the contract for the abovementioned Project the Guarantor hereby undertakes unconditionally to pay on demand to the Principal any sum which may from time to time be demanded in writing by the principal to an amount not exceeding Eighteen Thousand Two Hundred and Ninety Kina and Seventy five Toea (K18,290.75) in aggregate.

Payment will be made by the Guarantor to the Principal without reference to Contractor by the Guarantor and notwithstanding any notice to the Guarantor by the Contractor not to pay to the Principal any moneys hereunder and irrespective of the performance or non performance by the Contractor or the Principal of the terms of the said contract or any contract substituted therefor.

This undertaking shall continue in force either until notification has been received by the Guarantor from the Principal that this undertaking is no longer required by the Principal or until payment to the Principal by the Guarantor of the whole of the sum of Eighteen Thousand Two Hundred and Ninety Kina and Seventy five Toea.

Notwithstanding anything hereinbefore contained the Guarantor reserves the right to terminate this undertaking at any time upon payment to the Principal of the said sum of Eighteen Thousand Two Hundred and Ninety Kina and Seventy five Toea or such less sum as may be required by the Principal in exchange for this undertaking.

Dated at Port Moresby this 31st day of January 1980.

SIGNED BY QUEENSLAND INSURANCE (PNG) LTD.

By (Sgd)

its duly constituted officer in the presence of

(Sgd J C Martin)

and I certify that the person executing this instrument is personally known to me.

(name): (Sgd J C Martin)

Address: P O Box 814"

Note that the security deposit was given to the Independent State of Papua New Guinea and not to the Housing Commission which is an independent statutory body. The defendant has now abandoned its defence that it did not enter into any contract with the plaintiff. I note also that the document has been signed by some official of the defendant company but is not under seal, that is, not under the common seal of the company.

Pivot did not complete the work, went into liquidation, and owed the Housing Commission K200,000 on this contract. The plaintiff thereupon made demand upon the defendant to pay the K18,290.75 due under the security deposit. The defendant refused to pay.

In deciding this dispute the Court is required first to look at custom as the source of law under Sch 2.1 of the Constitution which in turn refers to the Customs Recognition Act (Ch No 19). Under s 5(g) of that Act, custom may be taken into account in relation to a transaction that the parties intended, or which justice requires, should be regulated wholly or partly by custom. In this case I do not consider that the parties for one minute intended that this dispute should be determined according to custom nor that justice requires that it should be. The parties are a government statutory body and a large company, and not individuals. The document arose out of a large construction contract which itself was not intended to be governed by customary law. One of the advantages of common law is that it is available in written form. Parties or their lawyers can readily research the law and regulate their affairs accordingly. Textbooks have been written on it, two of which will be quoted later. In addition, many cases have been published. As Professor Roebuck pointed out in DeVere and others, Essays on the Constitution of Papua New Guinea at 129, the common law has been nearly a thousand years in the making. Decisions have been reported for the last 600 years. The English Reports contain over 100,000 cases and the Law Reports which include the most important cases since 1865 now together contain about 150,000 cases. Well over 1,000 cases a year are reported in the various series of reports published in England. Advisers can thus draw upon a vast reservoir of decided cases. There are few local cases as less than 70 civil cases are reported each year.

At common law a contract to be binding must be either made under seal or supported by some consideration: see Chitty on Contracts, 24th ed (1977), par 131. The plaintiff says that I should find consideration in one of two forms. The first is the plaintiffs forbearance not to insist on security in the form of "cash, interest-bearing deposit, Government bonds, or Government inscribed stock" as required by par 4.2(a) of the contract. I do not agree with that argument. I have already quoted from par 4.2 above and it is clear that sub-par (a) and sub-par (b) are alternatives. Thus the contractor has the right to provide the security in the form of an insurance bond, for example, instead of cash, subject to the restriction that the form of the insurance bond must be approved by the Housing Commission whose approval cannot be unreasonably withheld. Counsel for the plaintiff argued that the forbearance on the part of the plaintiff is clearly shown in the recital of consideration in the first sentence of the contract which I have quoted above. I consider that recital is a sham. The Housing Commission did not agree to accept the security deposit in lieu of cash; under cl 4.2(b), Pivot had the right to present security in the form of an insurance bond, etc, provided the form of provision of it was approved by the Commission.

Counsel for the plaintiff argued secondly that it was in consideration of Queensland Insurance giving the security deposit to the Housing Commission, that the Commission entered into the construction contract with Pivot. That is not factually correct. The contract was signed on 7 January 1980 and the security deposit signed on 31 January 1980.

Counsel for the plaintiff argued that the security deposit was, in essence, a guarantee: in consideration of the Housing Commission entering into a contract with Pivot, Queensland Insurance guaranteed the due performance by Pivot of its obligation. The security deposit is not really a guarantee. If it was a guarantee then three parties would be involved and the argument would make sense. The consideration would then be:

"in consideration of the State granting the construction contract to Pivot, Queensland Insurance guarantees the due performance of the contract by Pivot in the event that Pivot should default thereunder".

A contract of guarantee is a contract by which the guarantor agrees to answer for the debt, default or miscarriage of the debtor to a third person: see s 6 of the Statutes of Frauds and of Limitations (Ch No 333). Volume 20 of Halsbury’s Laws of England (4th ed), par 101 at 49 defines a guarantee as:

"an accessory contract by which the promisor undertakes to be answerable to the promisee for the debt, default or miscarriage of another person, whose primary liability to the promisee must exist or be contemplated".

The security deposit in this case does not bear those features. It is true that Queensland Insurance is referred to in that document as the guarantor but its obligations are not conditional on any default by Pivot. The operative words of the document are as follows:

"QI hereby undertakes unconditionally to pay on demand to the [Housing Commission] any sum which may from time to time be demanded in writing by the [Housing Commission] to an amount not exceeding K18,290.70.

Payment will be made by [QI] to the [Housing Commission] without reference to [Pivot] by [QI] and notwithstanding any notice to [QI] by [Pivot] not to pay to the [Housing Commission] any moneys hereunder and irrespective of the performance or non performance by [Pivot] or the [Housing Commission] of the terms of the said contract ..."

Clearly this is an unconditional promise to pay and is not dependent on the non-performance by Pivot of some obligation under the contract.

The security deposit in this case is an unconditional bond to pay money on demand up to a stated maximum amount. The consideration for it does not move from the Housing Commission but rather from Pivot. Clearly Pivot elected to obtain this security deposit from an insurance company rather than pay cash, for example, as required by cl 4.2(a) of the contract and I can assume that Pivot paid some fee or other consideration to Queensland Insurance in order to obtain the document. I consider that no consideration was given by, or moved from, the Housing Commission to Queensland Insurance and thus the plaintiff is endeavouring to sue on a document not under seal and for which it gave no consideration. The document in this case is the same kind as the bank guarantees discussed in Wood Hall Ltd v The Pipeline Authority (1979) 141 CLR 443; 53 ALJR 487, a decision of the High Court of Australia. That case involved a large construction contract for a pipeline. The clause in the contract requiring the contractor to supply a cash security, a bank guarantee or a performance bond as security for the due performance of its work was very similar to our cl 4.2 which I have quoted. The four guarantees given by the bank were very similar to the document before me except that they were in the form of a deed. They were under seal and used the word "covenant" which is appropriate in a deed whereas our document used the word "undertake". Thus cl 1 of each deed in that case provided (at 447):

"The Bank unconditionally undertakes and covenants to pay on demand any sum or sums which may from time to time be demanded in writing by Owner up to a maximum aggregate sum of one million five hundred thousand dollars ($1,500,000.00) to be held by Owner as security for and until the performance and completion by Contractor of all of the conditions of the said Contract in all respects."

The following clauses made it clear that the bank’s liability under the deed was not dependent on any non-performance by the contractor. Barwick CJ (at 445) said that to describe the document as a guarantee was "a complete misnomer" because the relationship of the bank to the owner had none of the elements of suretyship. The bank document was really an unconditional bond to pay money on demand to the stated maximum amount. All the judges in that case agreed that the words "unconditionally undertakes and covenants to pay on demand" meant just that; that the bank’s obligation to pay was unconditional, and unqualified, hence not dependent on the existence of any breach of contract by the contractor nor upon any demand having been first made by the authority on the contractor. If this was not so, then the commercial effectiveness of such a document would be destroyed. Hudson’s Building and Engineering Contracts, 10th ed (1970), ch 17, deals with guarantees and bonds relating to building contracts. The learned author there states that building and engineering contracts often require the contractor to find sureties who will make themselves responsible for the due performance by the contractor of the work undertaken. The sureties may be bound by one of two ways: by a bond or by a contract of guarantee. At 800- 801, the learned author states:

"Unlike most other commercial transactions, consideration may not always be present as between surety and principal creditor to support a promise to guarantee a contractual obligation; frequently, indeed, such consideration as exists is between surety and principal debtor. It is for this reason that the bond, being a document under seal not requiring consideration, is so frequently employed for important contracts of suretyship, since on general principles, every agreement of suretyship, unless it be under seal (ie usually by bond), will be void unless it can be shown that it was entered into for valuable and legal consideration ..."

In this case the security deposit which should more accurately be called a bond or a performance bond, is not under seal and is not supported by any consideration. It is therefore void. This may seem an unfair result to the plaintiff but the remedy to ensure that it does not happen again lies in the plaintiffs hands. Clause 4.2(b) of the contract gave the Housing Commission the right to approve the document. The contracts clerk in the Housing Commission could have shown the document or a draft of it to a lawyer who should have been able to advise that it needed to be under seal and also that the Housing Commission should have been named as the beneficiary of it (the obligee) and not the State. The action is dismissed with costs granted to the defendant.

Action dismissed

________________

Lawyers for the plaintiff: Warner Shand & Co.
Lawyers for the defendant: Young & Williams.