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Note: To perform mechanical and piping installation work on two dewatering buildings located in Western Australia, Bluenergy CMC Pty Ltd (Contractor) contracted with Ottoway Engineering Pty Ltd (Subcontractor) for AUD 17,350,000. The parties entered into an Advance Payment Agreement by which Contractor advanced AUD 1,735,000 to Subcontractor. In exchange, they agreed to a ten percent monthly deduction in payments to Subcontractor.

To obtain the advance funds, Contractor obtained a loan from Westpac Banking Corporation (Lender/Beneficiary) under a Bill Facility. Pursuant to the Advance Payment Agreement, Subcontractor obtained a guarantee from National Australia Bank (Guarantor) in favor of Lender, which was its beneficiary. Subsequently, Contractor and Subcontractor entered into another agreement replacing the Advance Payment Agreement, under which the Guarantee was reduced to AUD 1,000,000.

When Contractor was liquidated, Lender/Beneficiary claimed under the guarantee for AUD 858,158.96. Subcontractor maintained that the purpose of the Guarantee was to assure its performance of the installation, which was completed, rendering the guarantee “null and void.” On the other hand, Lender/Beneficiary asserted that the Guarantee assured repayment of the loan.

The terms of the guarantee provided,

“…[Lender/Beneficiary], at the request of [Subcontractor] and [Guarantor], has agreed to accept it ‘in connection with the Agreement’ and that, in consideration of that, the [Guarantor] undertakes to pay [Lender/Beneficiary] an amount or amounts not exceeding the amount in total. As I have said, the amount in total is one million dollars.

The Agreement is identified in the Guarantee as follows:

‘PROJECT MOBILIZATION COST PLANT, EQUIPMENT'S AND RECOURSE [sic RESOURCES] FOR CONTRACT BETWEEN [SUBCONTRACTOR] ABN 70 125 531 428 AND [CONTRACTOR] ABN 33 160 063 187 EXECUTED ON THE 21ST OF AUGUST 2014 FOR THE PROVISION OF MECHANICAL & PIPING INSTALLATION & COMMISSIONING WORKS RELATING TO DEWATERING BUILDINGS 313 AND 314 CONVEYOR REPAIRS. THIS BANK GUARANTEE ISSUED TO SECURE THE LENDING OBLIGATIONS OF [CONTRACTOR TO [LENDER/Beneficiary].’

Under the Guarantee, [Lender/Beneficiary] has the right to payment of the amount (or part thereof) by the [Guarantor] upon provision of an unconditional written demand, without reference to the customer, despite any notice by [Subcontractor] to the [Guarantor] not to pay [Lender/Beneficiary], irrespective of the performance or non- performance by [Subcontractor] or [Lender/Beneficiary] of the Agreement in any respect, with no obligation on the [Guarantor] to inquire as to the performance or non-performance of the Agreement in any respect by [Subcontractor] or [Lender/Beneficiary] and with no obligation on the [Guarantor] to inquire as to the correctness or validity of an unconditional written demand made by [Lender/Beneficiary] pursuant to the Guarantee.”

In response, Subcontractor sued Lender/Beneficiary for an interim order restraining Lender/Beneficiary from taking additional steps to demand payment under the guarantee, which was granted. Subcontractor then moved for an interlocutory injunction, which would prohibit Lender/Beneficiary from demanding payment until trial. The Federal Court of Australia, Besanko, J., granted the motion for an interlocutory injunction.

To decide the nature of the guarantee, the Judge looked to the surrounding circumstances of the guarantee because the language in the guarantee referred to Subcontractor’s performance obligations under the Advance Payment Agreement, and to the Contractor’s borrowing obligations under the loan. The surrounding circumstances suggested that there was a connection between the Advance Payment Agreement and the guarantee because both were for AUD 1,735,000. Furthermore, the reductions to the guarantee amount were based upon Subcontractor’s performance. On this evidence, the Judge concluded that Subcontractor had made a prima facie case that the Guarantee was a performance bond.

As a subsidiary of a publicly held company, Subcontractor argued that further demands for payment of the Guarantee would negatively impact its shareholders and the relationship with its bank. The Judge decided that the negative impact on Subcontractor put the balance of convenience in Subcontractor’s favor.

[JMC]

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of the ICC or Coastline Solutions.