In a recent Tribunal decision, Crema Constructions Pty Ltd v Malvern Project Developments Pty Ltd and Ors (Building and Property) [2026] VCAT 49, Deputy President E Riegler heard an injunction application regarding performance security. This case considers critical issues of performance security, comprising of Bank Guarantees, Performance Bonds, liquidated damages, and risk allocation regimes in the context of practical completion and related extensions of time (“EOT”) claims. It especially highlights the importance of Contractors and Principles being well informed about their possible exposure to performance security and risk allocation regimes before and when entering a building contract.
Background
The Builder, Crema Constructions Pty Ltd was engaged by Malvern Project Developments Pty Ltd (the Principal) under an amended AS 4902‑2000 design‑and‑construct Contract dated 5 April 2022 to deliver the mixed‑use “Malvern Collective” development.
The works were split into six separable portions, each with its own practical completion date. The Contract required Crema to furnish performance security in the form of two unconditional bank guarantees and one performance bond, totalling $6,100,630.50.
During construction, Crema lodged 56 extension‑of‑time (EOT) claims. The Superintendent assessed only nine of those claims as granting extensions, leaving the remaining separable portions “late” and triggering liquidated damages under Clause 34.7. The Principal claimed $8,706,700 in liquidated damages (capped at $22,000 per day) and served a series of recourse notices, the latest dated 21 November 2025, asserting a right to draw on the performance security.
Crema sought an interlocutory injunction to restrain the Principal from exercising that right to have recourse to security; arguing that numerous EOT claims had not been properly assessed and that the principal’s actions were unconscionable.
The matter was heard at Victorian Civil and Administrative Tribunal (VCAT) on 3 December 2025, with a final order issued on 16 January 2026.
This case serves as a stark reminder to builders about the serious financial and legal risks associated with performance bonds, bank guarantees, and contractual security provisions. Not understanding how tribunals interpret these provisions can result in catastrophic financial consequences.
Key Legal Principles Affecting Builders
1. Performance Security as a Risk Allocation Device
The Tribunal relied heavily on established case law, which establish that performance bonds can serve two distinct purposes:
(a) providing security against default; and
(b) allocating risk as to who will be out of pocket while disputes are resolved.
As explained by Callaway JA in Fletcher Construction, the second purpose means the beneficiary is able to call upon the guarantee even if it turns out, in the end, that the other party was not in default (depending on the interpretation of the underlying contract). This was described as a “pay now argue later” regime and should be somewhat familiar given that, despite the latter being legislative in nature, the Security of Payment Regime operates similarly by forcing prompt payment of progress claims, nullifying provisions that would otherwise delay payment and relegates disagreement to a rapid adjudication process so as not to impede the claimants right to receive money immediately.
In this case, the Tribunal found that Clause 5.2 of the Contract operated as a risk allocation device because it allowed the Principal to have recourse to security where, acting reasonably, the Principal asserts a bona fide entitlement to payment of money. Critically, this did not require the Principal to prove an absolute entitlement to liquidated damages; merely to reasonably assert a bona fide claim. In so far as risk allocation, courts and tribunals are reluctant to ignore the parties preference to resolve disputes that may arise between them via whatever lawful mechanism they choose as evinced in their agreement; even if that results one of the parties (typically the Contractor) assuming the risk and paying the agreed security pending final resolution to the question of whether a progress date has been missed and or a security threshold triggered.
2. Limited Scope for Challenging Calls on Security
The Tribunal, citing Uber Builders and Developers Pty Ltd v MIFA Pty Ltd [2020] VSC 596 and Clow Engineering Ltd v Oil and Natural Gas Corporation (2008) 249 ALR 458, noted there are only three principal exceptions to the rule that courts will not enjoin a party from calling on a performance guarantee:
• Fraud by the party seeking to call on the security
• Unconscionable conduct in calling on the security
• Breach of a contractual promise not to call on the security unless certain conditions are satisfied; and then calling on the security despite absence of any such condition.
Importantly, the mere existence of a genuine dispute about the underlying claim is not sufficient grounds to restrain a call on security where the contract operates as a risk allocation device. As such, a key question in this case was whether the parties intended to create a risk allocation device or merely a security bond. The Tribunal found that the words used in the parties contract, did evince an intention to create a risk allocation device; clause 5.2 stated that the right to have recourse to the Performance Security “crystalize[d] when the Principal assert[ed], acting reasonably, a bonafide entitlement to payment of money by the contractor under or in connection with the contract”; as already stated the principle did assert that.
3. Extension of Time Claims and Deemed Approval
The Builder argued that EOT claims not assessed within 28 days should be deemed as approved under the contract. The Tribunal firmly rejected this interpretation, finding that Clause 34.5 merely required the Superintendent to provide a provisional assessment within 28 days but did not create a deeming provision.
The Tribunal reasoned that construing the clause as automatically deeming claims accepted would create significant practical difficulties, particularly where insufficient information had been provided to assess the claim. This would force superintendents to summarily refuse claims to avoid automatic approval, leading to further disputes.
Furthermore, even if the Superintendent had assessed EOT claims outside the 28-day timeframe, this did not render the principal’s claim for liquidated damages unreasonable or not bona fide. The Tribunal emphasised that disputation over the Superintendent’s provisional assessments did not prevent the principal from relying on those assessments to ground a claim for liquidated damages.
4. The Standard for Acting Reasonably and Bona Fide Entitlement
The Tribunal clarified that the requirement for a principal to be acting reasonably; when asserting an entitlement to payment imports an objective standard based on the information and facts known or which reasonably ought to have been known at the time. However, it does not require the principal to have knowledge that would decisively establish the entitlement; only that the principal acted reasonably in making the claim.
In applying this standard, the Tribunal found that the reasons given by the Superintendent for rejecting EOT claims were entirely of the kind expected for a building dispute; and related to issues of contractual interpretation and programming/critical path delay that should be determined at final hearing. The assessments were not so obviously wrong or specious that reliance on them would be unreasonable.
5. Unconscionable Conduct Requirements
Crema alleged the principal acted unconscionably in calling on the security. The Tribunal, citing L.U. Simon Builders Pty Ltd v Cardigan Commercial Pty Ltd [2025] VSC 655 and the High Court’s decision in Stubbings v Jams 2 Pty Ltd (2022) 276 CLR 1, found that unconscionability requires conduct that is offensive to conscience and represents a serious step warranting condemnation.
The mere fact of disputes over the Superintendent’s assessments and reliance on certified dates for practical completion did not constitute unconscionable conduct. The Tribunal found this was not a case where the principal asserted a right to liquidated damages that was unfounded with the calculation being based on the Superintendent’s legitimate certification process, notwithstanding genuine disputes about those assessments.
6. Materials Security Distinguished from Performance Security
The Tribunal made an important distinction between performance security and materials security. While it refused to restrain access to the performance security, it ordered the return of bank guarantees totalling $3,819,999 that had been provided specifically for unfixed plant and materials (joinery and facade works) finding that the necessary conditions for retaining that security had not been met.
The Tribunal found that materials security serves a different, more limited function to provide security for payments made for unfixed materials until they are incorporated into the works. Once the materials are incorporated (which the Superintendent had certified as 100% complete), the purpose of the security is fulfilled. The Tribunal rejected the argument that this security could be retained for potential defects, finding insufficient evidence of defects that would justify retention.
Critical Lessons for Builders
Lesson 1: Understand Your Security Obligations Before Signing
The Tribunal emphasised, citing L.U. Simon Builders, that builders are expected to be commercially aware of the risks they are assuming.
Be mindful that in this case, as may be the case with similar matters, the related clause (5.2) did not require proof of entitlement at the time of draw-down.
Action Point: Before signing any construction contract, carefully review all security provisions, particularly:
• The conditions under which the principal can access security
• Whether the clause uses language like acting reasonably or bona fide entitlement; (which creates a risk allocation device) versus requiring proof of actual entitlement
• Any provisions limiting your right to challenge calls on security
• The notice period required before security can be accessed (in this case, only 2 days)
Lesson 2: Document EOT Claims Meticulously
The Tribunal noted that many EOT claims were rejected because Crema failed to provide sufficient information, including:
• Construction programs that accurately reflected the progress of works
• Evidence that delays affected the critical path
• Documentation requested by the Superintendent
Action Point: Implement robust project documentation systems:
• Maintain detailed, updated construction programs showing the critical path
• Record all delay events contemporaneously with photographs, correspondence, site records and critical path programming
• Engage programming experts early to demonstrate critical path impacts
• Respond promptly to Superintendent requests for information
• Submit EOT claims when the delaying event is clear, rather than waiting for it to become ongoing.
The Tribunal found that delays in providing information may have delayed the Superintendent’s ability to determine claims.
Lesson 3: Don’t Rely on Deemed Approval Provisions
Builders often assume that if the Superintendent fails to assess an EOT claim within the contractual timeframe, the claim is automatically approved. This case demonstrates that tribunals will not read such deeming; provisions into contracts unless they are express and unambiguous. Also, importantly, in this case, the relevant clause (34.5) only mandated that the Superintendent provide a provisional assessment; it did not deem the provisional assessment as constituting an approved claim enabling an EOT.
Action Point: If having deemed approval for late assessments is important to you:
• Negotiate express deemed approval clauses during contract formation
• Ensure the language is clear and unambiguous (e.g., If the Superintendent fails to assess an EOT claim within 28 days, the claim shall be deemed approved in full)
Lesson 4: Disputes Over Assessments to Stop Security Calls
One of Crema’s key arguments was that it disputed 1,757 days (cumulative) of EOT assessments and claimed entitlement to an additional 400 days, which would extinguish any liquidated damages liability. The Tribunal found this irrelevant to whether the principal could access security.
As noted in Sugar Australia and reaffirmed in this decision, where security operates as a risk allocation device, the beneficiary of a performance guarantee… will be entitled to call on the guarantee even if it turns out, ultimately, that the other party was not in default and notwithstanding the existence of a genuine dispute.
Action Point: Recognise that once you are in a dispute:
• The existence of your dispute will not prevent the principal from calling on security
• You may need to provide alternative security (cash or additional bank guarantees) to prevent reputational damage
• Focus on expeditiously resolving substantive disputes rather than fighting interlocutory battles over security
• Budget for the possibility that you will be out of pocket; during disputes and may need to fund operations from other sources
• Negotiate to limit draw-down by incorporating a contractual limitation, such as requiring a final adjudication amount before enabling recourse to the security.
Lesson 5: Protect Against Calls on Security Through Contract Negotiation
The Tribunal noted that some contracts contain express restrictions on the right to access security.
Action Point: During contract negotiations:
• Seek to modify recourse clauses to require proof of entitlement rather than mere assertion
• Negotiate longer notice periods (the 2-day notice in this case provided almost no opportunity to respond)
• Include dispute resolution processes that must be exhausted before security can be accessed
• Ensure provisions requiring superintendents to act honestly; and arrive at reasonable measures; are not undermined by broadly worded recourse clauses
• Consider sunset clauses that prevent recourse to security after certain milestones or timeframes
While principals will resist such changes (as they diminish the commercial advantage of risk allocation), even partial success in negotiating these terms can provide meaningful protection.
Lesson 6: Material-Specific Security Should Be Returned Upon Incorporation
The Tribunal’s decision to order return of the materials security provides an important principle: security provided for specific, limited purposes cannot be converted into general performance security once that purpose is fulfilled.
Action Point: When providing security for specific items:
• Ensure the contract clearly identifies the security as being for a specific purpose (e.g., additional security for unfixed plant and materials)
• Include express provisions requiring return of such security once the materials are incorporated or the purpose is fulfilled
• Obtain written confirmation from the Superintendent when materials are fully incorporated
• Actively demand return of such security promptly don’t wait for the principal to voluntarily release it
• Consider whether Clause 5.7 retention rights for defects should apply to material-specific security
Lesson 7: Manage Reputational and Financial Risks
Crema argued that having security called would damage its reputation with financiers and affect its ability to tender for government work. While the Tribunal acknowledged these concerns, it found them insufficient to outweigh the commercial purpose of the security provisions. However, the Tribunal did note, that reputational damage could be, in any given case, very powerful where there is doubt about the rightfulness of calling on security.
Action Point: To mitigate reputational and financial risks:
• Maintain positive relationships with your financiers and communicate proactively about disputes
• Consider tendering cash or alternative security if a call on security appears imminent
• Build financial reserves to weather disputes without relying on security being returned
• Evaluate whether undertakings as to damages might persuade a principal to defer accessing security
• Understand that courts may view reputational damage as a risk you assumed when entering the contract
Lesson 8: Time Is Critical; Act Immediately
In this case, the contract required only 2 days’ notice before the principal could access security. Even where the Tribunal found a question for trial (whether the Recourse Notice properly referenced all Superintendent assessments), it noted this would provide little relief to Crema as the principal could simply issue a fresh notice within days.
Action Point: When you receive a recourse notice:
• Seek immediate legal advice
• Evaluate whether you have grounds for fraud, unconscionability, or breach of contractual preconditions
• Be prepared to file urgent court/tribunal applications for interlocutory relief
• Consider whether you can negotiate with the principal to defer action while settlement discussions proceed
• Document everything; any technical defects in the notice might provide temporary relief
Conclusion
For builders, the message is clear: protection must be built into contracts from the outset through careful negotiation, backed by meticulous project documentation and proactive EOT claim management. Waiting until disputes arise is too late. By understanding the legal landscape established by these authorities and implementing the protection strategies outlined in this article, builders can better manage the substantial risks associated with performance security provisions.
This is not an area where builders can afford to be complacent. The financial stakes are simply too high.
Important Disclaimer
This article is provided for general information purposes only and does not constitute legal advice. The content is based on a specific VCAT decision and may not apply to all circumstances. Builders should seek independent legal advice regarding their specific contracts and circumstances before taking any action. The law in this area is complex and continues to develop through case law.