Factual Summary: Contractor contracted with Owner for the construction of a building. Under the terms of the contract, Contractor was required to provide security for any overpayments in the form of a bank guarantee totaling AUD 562,000 issued by Guarantor in favor of Owner/Beneficiary. Under the contract, claims for payment were to be submitted to Superintendent who would issue payment certificates to Contractor and Owner/Beneficiary stating the amount owed by one party to the other. If Contractor failed to pay the amount due by it, Owner/Beneficiary could draw on the bank guarantee.

If Contractor failed to comply with directions issued by Superintendent regarding work to be completed within seven days of giving a written notice by Owner/Beneficiary of its intent to have the work done by other persons, a separate clause allowed Owner/Beneficiary to hire an independent contractor to complete the work. In such a case, Contractor would owe Owner/Beneficiary an amount determined by Superintendent based on the lowest of three quotations from independent contractors. Owner/Beneficiary complained to Contractor about some of the completed work, and eventually solicited independent contractors to correct it.

When Contractor failed to reimburse Owner/ Beneficiary for amounts owed, Contractor challenged the validity of the payment certificate. Owner/ Beneficiary then drew on the guarantee. Contractor applied for an interlocutory injunction to prevent Owner/Beneficiary from drawing on the bank guarantee pending a hearing on the validity of the payment certificate. The Supreme Court of Queensland, Trial Division, Douglas, J., granted Contractor 's application, enjoining Owner/ Beneficiary from drawing on the bank guarantee pending resolution of the dispute.

Legal Analysis:

1. Strict Compliance: Contractor argued that strict compliance was required regarding the work corrections clause in order for a debt to be due between Contractor and Owner/Beneficiary. Contractor complained that Superintendent provided neither the required seven day notice nor specific enough instructions regarding the repairs Owner/ Beneficiary sought. Contractor further argued that the information Superintendent provided to the independent contractors was too vague to provide a basis for a proper estimation of the rectification cost. Because Contractor disputed the validity of the payment certificate, Contractor believed it had not breached the contract. The Judge agreed that the structure of the contract effectively created only a secondary obligation, meaning that the Owner/ Beneficiary must first prove that Builder had breached before drawing on the bank guarantee. Therefore, an interlocutory injunction was warranted, pending the resolution of the dispute.

2. Balance of Convenience: Contractor argued that allowing Owner/Beneficiary to draw immediately on the bank guarantee would "cause . . . irreparable harm in respect of their reputation in the building industry, going beyond that which may be cured by an order as to damages." The Judge agreed because "the balance of convenience in a case like this is influenced by the possibility of awarding damages by way of interest in the event that no final injunction is granted."

3. Illegality: Contractor also orally argued that the process was flawed irremediably because Superintendent was not authorized under relevant local legislation to act in its role. The Judge noted that "a serious question to be tried has been shown [with respect to that issue, and it] is not a debate that should be resolved without a fuller hearing of the application."

Comment: The opinion does not disclose whether the refund guarantee is independent but analyzes the problem as if it is not. If it is an independent undertaking, this decision is another blow to the credibility of Australian independent undertakings.



The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.