Article

Factual Summary: Employer/Beneficiary contracted with Contractor/Applicant to build a retirement village development. As a security for its commitments under the contract, Contractor/ Applicant obtained two bank guarantees, each in the amount of AUD 190,000, from Issuer in favor of Employer/Beneficiary. The parties subsequently became involved in a dispute about building defects and payment for work, resulting in a number of proceedings relating to an adjudication decision made under the Building and Construction Industry (Security of Payment) Act.

The construction contract did not include a provision providing Contractor/Applicant with a fettered or unfettered recourse right to draw on the bank guarantees. However, a letter sent by Contractor/Applicant warned, that should Employer/Beneficiary attempt to have recourse to the guarantees, Contractor/Applicant would seek a preliminary injunction to prevent such a drawing. Employer/Beneficiary responded, confirming that no recourse would be attempted save by an order or agreement in due course.

After the underlying dispute between the parties was resolved in favor of Contractor/Applicant by a final decision by the Supreme Court of the Australian Capital Territory, Contractor/Applicant asserted that Employer/Beneficiary had repudiated the contract and requested the return of the security. As the parties prepared for arbitration to resolve remaining disputes, Contractor/Applicant became aware that Employer/ Beneficiary had approached Issuer to call upon the guarantees. Contractor/Applicant then applied for an ex-parte injunction restraining drawing of the security, which the Supreme Court of the Australian Capital Territory granted on a temporary basis until a hearing could be held.

Thereafter, Contractor/Applicant issued two dispute notices on the entitlement of Employer/ Beneficiary to liquidated damages and to withhold the security, having regard to its assertion that the contract had been terminated. Contractor/Applicant then filed an application for an interlocutory injunction to restrain Employer/Beneficiary from calling on the two guarantees. The Supreme Court of the Australian Capital Territory, Mossop M, J. continued the injunction against Employer/Beneficiary, preventing it from calling on the two guarantees.

Legal Analysis:

Entitlement to call on the guarantees: The Judge determined that the critical issue appeared to be whether as a matter of construction of the contract, Employer/Beneficiary's arguable claim made in good faith for damages or compensation entitled it to claim the guarantee, or whether it was required to demonstrate that its entitlement to damages was binding on the parties prior to recourse against the security. If the latter were not the case, the Judge noted that it should issue an interlocutory injunction.

Referring to Clough Engineering Ltd. v. Oil and Natural Gas Corp. [2008] 249 ALR 458 [abstracted in 2009 Annual Survey Letter of Credit Law & Practice at 410], Bachmann Pty Ltd. v. BHP Power New Zealand Ltd. [1999] 1 VR 420, Lucas Stewart Pty Ltd. v. Hemmes Hermitage Pty Ltd. [2010] NSWCA 283, the Judge noted that there are there are two principal goals that parties may seek to achieve by requiring the provision of performance bonds: "One is to provide security in the event of the insolvency of the contractor. The other is to enable the principal to obtain prompt payment of amounts it claims, notwithstanding disputes raised by the contractor." Despite the similar legal principle applied in these precedents, the cases bore different results, suggesting that the subtleties of particular contractual provisions will determine whether there is entitlement to call upon the security.

Employer/Beneficiary relied on Wood Hall Ltd. v. Pipeline Authority, [1979] 141 CLR 443, where a contractor provided an unconditional bank guarantee, which, it was determined, the building owner could drawn on. However, the Judge noted that that case was decided on a limited basis-the owner was entitled to call on the guarantee so as to convert security or retention guarantees into security or retention held in cash. It did not find that Wood Hall stood for "the proposition that the existence of an unconditional security will in the absence of a negative stipulation give rise to an entitlement as between the parties to a contract to an unconditional entitlement to call upon the security...except where there is fraud or unconscionability."

The Judge observed that in cases where a contract does not expressly deal with the circumstances in which the guarantees may be called on, the capacity within the contract would permit recourse to the security must be implied. "It would be sufficient, in order to determine the current application, to find that it is possible to imply into the contract a term which fulfills the broader allocation of risk purpose" (as opposed to merely the security purpose of the guarantee).

However, citing Hawkins v. Clayton, [1988] 164 CLR 539 and Esso Australia Resources Ltd. v. Plowman, [1995] 183 CLR 10, the Judge noted: "the authorities do not extend to require such a term to be implied as a matter of law into a contract of this nature wherever there is an absence of a negative stipulation". The Judge also found that the implication of such a term would not meet the test for the term to give business efficacy to the contract as set out in BP Refinery (Westernport) Pty Ltd. v. Shire of Hastings [1977] 180 CLR 266 at 28 is clearly not open to say that an entitlement extending to the risk allocation purpose "goes without saying", the third element in the formulation in BP. The Judge ruled that although Employer/Beneficiary's claim was made bona fide, the contract did not permit recourse in circumstances where the claim was subject to genuine dispute.

Damages: The Judge ruled that damages would not be an appropriate remedy because the parties were not in dispute that Employer/Beneficiary was in very difficult financial circumstances, and there was a significant risk that any monies paid to it would not be recoverable if it were found that it was not entitled to them. Therefore, the Judge ruled that Contractor/ Applicant was entitled to an injunction to restrain Employer/Beneficiary from calling on the guarantee.

Comment: This line of cases turns the expectation of beneficiaries on its head. In most instances, the expectation is that the undertaking would be drawn on where there was a genuine dispute and only subject to an injunction where there was no basis whatsoever for a drawing.

[KCM]

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This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.