Article

Parties: Contracting Pty Ltd (Redline) - Applicant/Contractor
MCC Mining (Western Australia) Pty Ltd (MCC Mining) - Beneficiary/Principal
Swiss RE International SE - Guarantor/Surety

Underlying Contract: Construction and installation of three pipelines, each 28.9 km in length, in Western Australia

Guarantee: 4 Unconditional Insurance Bonds totalling A$6,636,801.72 - no rules stated

Facts:
On 10 November 2011, Applicant filed an urgent application for an interlocutory injunction restraining Beneficiary from calling upon any or all of four unconditional undertakings. The underlying contract was for the construction and installation of three pipelines, each 28.9 km in length, in Western Australia. The contract price was A$66,368,017. Security was required by cash, retention moneys or an approved unconditional undertaking given by an approved financial institution to the value of 10% of the contract value. Clause 5.2 provided:

Security shall be subject to recourse by a party who remains unpaid after the time for payment where at least 5 days have elapsed since that party notified the other party of intention to have recourse.

A series of disputes arose and on 7 October 2010, contract was terminated.

Interlocutory relief
The Court stated it would grant interlocutory relief where there is a prima facie case and the balance of convenience favours the grant of the injunction. In discussing the prima facie case requirement for an interlocutory injunction, Gummow and Hayne JJ in Australian Broadcasting Corporation v O'Neill [2006] HCA 46 observed:

it is sufficient that the plaintiff show a sufficient likelihood of success to justify in the circumstances the preservation of the status quo pending the trial.

Applicant contended Beneficiary was precluded from calling upon the unconditional undertaking by reason of the terms of a negative stipulation implied in clause 5.2. Applicant relied on Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd [2008] FCAFC 136 (Clough Engineering) (extracted in the Annual Review at 09:410), which recognised this ground as the third of three exceptions to the general rule that a court will not interfere with the exercise, by a beneficiary, of a right to call upon an unconditional performance guarantee or bond.

Applicant referred to the wording of clause 5.2 and argued that Beneficiary was not entitled to call upon the unconditional undertaking because there had been no determination under the contract that the amounts claimed in the letters of demand were due for payment.

Unconscionability
Applicant contended that Beneficiary had engaged in misleading or deceptive conduct in relation to the specifications for the tolerance standards of the pipe to be provided. Applicant contended that the misleading or deceptive conduct claim was to be treated, by analogy, as falling within the unconscionability exception recognised by the Full Court in Clough Engineering as the second of three exceptions to the general rule. Applicant said that Beneficiary should not be permitted to take advantage of its own wrongdoing.

The Court considered that Applicant had not demonstrated a sufficient likelihood of success at trial to justify the maintenance of the status quo pending a trial, by way of a grant of an interlocutory injunction by the Court.

Allocation of Risk
The Court approved the approach taken in Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812 where the Court recognised that there are generally two commercial reasons why a beneficiary of a performance guarantee may have agreed to a provision in the underlying contract that the contractor provide the guarantee. One is to provide security for a valid claim against the contractor. The second, which is additional to the first, is to allocate the risk between the parties as to who shall be out of pocket pending the resolution of a dispute between them. Callaway JA stated:

Remembering that we are speaking of guarantees in the sense of standby letters of credit, performance bonds, guarantees in lieu of retention moneys and the like, the latter purpose is often present and commercial practice plays a large part in construing the contract. No implication may be made that is inconsistent with an agreed allocation of risk as to who shall be out of pocket pending resolution of a dispute and clauses in the contract that do not expressly inhibit the beneficiary from calling upon the security should not be too readily construed to have that effect. As I have already indicated, they may simply refer to the kind of default which, if it is alleged in good faith, enables the beneficiary to have recourse to the security or its proceeds.

Applying this reasoning, His Honour stated "the contract is to be construed in its commercial context, namely, that performance guarantees and like instruments, are treated as providing the beneficiary thereof with a security which is only defeasible in such limited circumstances, that it is to be regarded as approximating cash. Further, the parties to a contract which provides for the issue of a performance bond, are to be taken as having contracted, in the knowledge of the special status accorded to performance bonds in the industry, and the legal principles relating to the construction of contractual terms insofar as they affect the right of a beneficiary to call upon a performance bond."

His Honour concluded that the argument put forward by the Applicant would "have the propensity to undermine substantially the commercial purpose of requiring a contractual party to provide a performance bond." For the Applicant's argument to succeed, the Court considered that very clear wording must be used to impose conditions "which so substantially undermine the effectiveness of a performance bond as a commercial security instrument."

The Court gave weight to the parties' characterisation of the instrument as "unconditional", in particular the words "unconditionally undertakes to pay on demand any sum or sums which may from time to time be demanded by [Beneficiary]"; and that the surety "unconditionally" agrees to make the payment demanded "without reference to [Applicant] and notwithstanding any notice given by [Applicant] not to pay the same".

The application was dismissed.

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Bond No: 201001-0041

At the request of Redline Contracting Pty Limited ACN 001 685 025 located at 9/26 34 Weippin Street, Cleveland QLD 4163 ("the Contractor") and in consideration of MCC Mining (Western Australia) Pty Limited ABN 69 123 854 740 located at Level 8, 99 St George's Terrace, Perth WA 6000 ("the Principal") accepting this undertaking for the Contractor's performance obligations in respect of the contract for Concentrate, Concentrate return water and desalination water pipe installation package located at Karratha, Western Australia - Contract Number MCCM-C-0030

Swiss Re International SE ARBN 138 873 211 begin_of_the_skype_highlighting ("the Surety") C/- Assetinsure Pty Limited ACN 066 463 803 Level 3, 44 Pitt Street, Sydney NSW 2000

unconditionally undertakes to pay on demand any sum or sums which may from time to time be demanded by the Principal to a maximum aggregate sum of One Million, Six Hundred and Fifty Nine Thousand, Two Hundred Dollars and Forty Three Cents ($1,659,200.43).

This undertaking is to continue until notification has been received from the Principal that the sum is no longer required by the Principal or until this undertaking is returned to the Surety or until payment to the Principal by the Surety of the whole of the sum or such part as the Principal may require.

Should the Surety be notified in writing, purporting to be signed by or for and on behalf of the Principal that the Principal desires payment to be made of the whole or any part or parts of the sum, it is unconditionally agreed that the Surety will make the payment or payments to the Principal forthwith without reference to the Contractor and notwithstanding any notice given by the Contractor not to pay same.

Provided always that the Surety may at any time without being required so to do pay to the Principal the sum of One Million, Six Hundred and Fifty Nine Thousand, Two Hundred Dollars and Forty Three Cents ($1,659,200.43) less any amount or amounts it may previously have paid under this undertaking or such lesser sum as may be required and specified by the Principal and thereupon the liability of the Surety hereunder shall immediately cease.

This undertaking is not negotiable, transferable, assignable or chargeable and shall be returned to the Surety immediately upon its expiry.

This undertaking shall be governed by the laws of the State of Western Australia.
(Original emphasis.)

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Comments - The "guarantees" were called unconditional insurance bonds and were treated by the Court as unconditional undertakings. However, the Court did not use the word "independent" in its analysis, concentrating on the "special status accorded to performance bonds".

By using the expression "maintenance of the status quo" the Court meant the freezing of any payment under the bond until such time as the contractual disputes had been decided rather than allowing payment of the bond. The case raised the possibility of "misleading and deceptive conduct" as possible grounds to found a restraining order to prevent a beneficiary from making a call, but did not need to decide the issue in this case.

* Dr Alan Davidson, Solicitor and Barrister; Senior Lecturer TC Beirne School of Law, University of Queensland (Australia).

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