In Tomkins Commercial & Industrial Builders Pty Ltd v Pacific Diamond 88 Pty Ltd as trustee for the Pacific Diamond 88 Unit Trust [2024] QSC 321, the Queensland Supreme Court considered whether a principal was entitled to set off its liquidated damages claim from a progress payment in circumstances where the parties had deleted key payment provisions from a standard form contract, or in the alternative, whether to grant an injunction restraining the principal from having recourse to bank guarantees provided as security under the contract.

Pacific Diamond 88 Pty Ltd engaged Tomkins Commercial & Industrial Builders Pty Ltd to construct a commercial property, pursuant to an amended AS4902-2000 standard form contract. Relevantly, the parties deleted a sub-paragraph in the payment regime requiring the superintendent to certify any claims by the principal to retain monies owed by the builder.

During construction, Pacific Diamond sought to set off a $2.6 million liquidated damages claim against a payment that was otherwise due to Tomkins. Pacific Diamond also gave notice of its intention to call on bank guarantees provided as security under the Contract to recover the net amount owed to Pacific Diamond. In response, Tomkins sought a declaration from the Court that Pacific Diamond was not contractually entitled to set off its liquidated damages claim on the basis that the sub-paragraph enabling Pacific Diamond to do so had been intentionally deleted by the parties. Tomkins also sought an injunction to restrain any call on its bank guarantees.

The Court found that the payment provision was ambiguous, in particular because it allowed for the set off of amounts included in a “certificate in paragraph (b)” notwithstanding this sub-paragraph (b) had been removed from the Contract. In this regard, the Court observed that where the words of a contract are ambiguous, evidence of prior negotiations including the language used and the surrounding circumstances is admissible to establish the background facts and the subject matter of the contract that were objectively known to both parties. Further, as the payment provision was ambiguous, common law permitted the Court to refer to the words deleted from the standard form contract to aid in its contractual interpretation.

In applying these principles, the Court had regard to the pre-contractual evidence submitted by Tomkins noting:

1. that Tomkins had expressly rejected drafting that would allow Pacific Diamond to recover liquidated damages on demand or deduct it from certified payments and security; and
2. it may be inferred the parties agreed Pacific Diamond was not to have the right to elect to set off and intended to delete the relevant sub-paragraph.

Accordingly, the Court held that the proper interpretation of the varied Contract prohibited Pacific Diamond from “setting off” competing progress payments and liquidated damages during the construction phase. The Court further found that such action was only available at the final progress payment stage of the agreement under other general dispute provisions.

Whilst not pivotal to the decision, the Court provided guidance on Tomkins’ alternative application for an injunction to prevent Pacific Diamond from calling on the bank guarantees pending resolution of the arbitration. Noting the injunction issue would only arise if the Court concluded the Principal had the right to set off payment claims against certified liquidated damages the Court did not need to resolve this issue.

Notwithstanding, the Court went on to state it would have granted the injunction for the reasons that:

1. the injunction period would be short, towards the end of the Contract works;
2. the Contract protected both parties’ right to seek injunctive relief;
3. Tomkins’ extension of the bank guarantee in addition to the usual undertaking of damages provided significant financial security to Pacific Diamond;
4. the risk of Tomkins not being repaid outweighed the security of Pacific Diamond in circumstances where Pacific Diamond, as a special purpose vehicle for the project, may have nominal equity at the conclusion of the project; and
5. although of much lesser weight, the reputational damage to Tomkins (which could not be remedied by damages) was minimised by preventing Pacific Diamond from calling on the bank guarantees.

The Court ordered Pacific Diamond pay Tomkins’ application costs and the outstanding $694,343 progress payment owed to Tomkins.

It is common for parties to use a standard form contract as the foundational structure of an agreement and to tailor that agreement to their particular requirements. However, any variations to a standard form contract must be carefully considered to avoid any unintended consequences and minimise subsequent disputes over ambiguous language.

The judgment is available here.