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Note: Acciona Infrastructure Australia Proprietary Limited, B.M.D Constructions Proprietary Limited, and Ghella Proprietary Limited (Contractors/Beneficiaries) formed Transcity Joint Venture (Joint Venture) for the construction of a road known as Legacy Way in Australia, which included a pair of major tunnels. Joint Venture entered into a subcontract dated 6 December 2011 with Telvent Australia Proprietary Limited (Subcontractor/Applicant) to install Integrated Technology Services (ITS), which monitored communication and management control systems in the tunnels on Legacy Way for an adjusted price of AUD 17.6 million and EUR 11.7 million.

Clause 2.6 of the subcontract required Subcontractor/Applicant to provide two “unconditional bank guarantee[s]” in favor of Contractors/Beneficiaries. The subcontract contained detailed procedures regarding the guarantees in Clause 2.6 (c), which is reproduced at the end of the summary. The Australia and New Zealand Banking Group Limited (Issuer) issued an “unconditional bank guarantee” at Subcontractor/Applicant’s request in the amount of AUD 882,495 in favor of Contractors/Beneficiaries to secure Subcontractor/Applicant’s performance obligations under the subcontract. Subcontractor/Applicant completed construction on 23 June 2015 and the tunnels opened on 24 June 2015.

On 20 July 2016, Contractors/Beneficiaries drew on the guarantees. The next day, they undertook to do nothing further and, on the following day, Subcontractor/Applicant sued Contractors/Beneficiaries seeking an injunction to prevent it from demanding or receiving payments under the guarantees and seeking declaration that there were no entitlements to draw. The Supreme Court of Queensland, Jackson, J., denied Subcontractor/Applicant’s injunction application.

The Judge indicated that an interlocutory injunction could not be issued unless there was a serious question or prima facie case. Subcontractor/Applicant argued that Contractors/Beneficiaries were not entitled to draw on the guarantee because they had not made a bona fide claim notification in writing within the meaning of subcontract Clause 2.6(f)(i). It was its position that “a mere honest or bona fide belief is not enough to for a bona fide claim. It submits there must also be a claim that is not irrational or misconceived, or an arguable claim that is not specious, fanciful or untenable.” The Judge concluded that this so-called “objective element” was “a gloss on the contractual text that is not warranted.” The Judge stated, “in my view, it would be enough if the respondents were dishonest or had a belief that there was no reasonable basis for the 20 July claim.”

The Subcontract provided that the Subcontractor/Applicant “must not take any steps to injunct or otherwise restrain . . . any issuer of any unconditional undertaking provided under this clause 2.6 from paying [Contractors/Beneficiaries] pursuant to the unconditional undertaking . . . except to the extent that [Contractors/Beneficiaries] fraudulently or unconscionably takes any steps for the purposes of making a demand under any unconditional undertaking.” With respect to Subcontractor/Applicant’s claim of fraud, the Judge stated that an injunction would be appropriate “if [Contractors/Beneficiaries] were dishonest or had a belief that there was no reasonable basis for the 20 July Claim. On the other hand, in my view, the complexity of claims made under construction contracts is not infrequently such that a party may consider that there is a possibility that it has an entitlement to a claim without having to hand the evidence to demonstrate that the possibility is right.” The Judge concluded that the 20 July claim was not fraudulent within the meaning of Clause 2.6(g).

Subcontractor/Applicant further argued that allowing Contractors/Beneficiaries to draw on the guarantee would risk reputational loss for Subcontractor/Applicant from either future customers or banks. Contractors/Beneficiaries, however, argued that their demands were bona fide claims made in writing and satisfied the requirements in Clause 2.6(f)(i). The Judge concluded that it was possible that Subcontractor/Applicant would suffer a reputational loss from a demand on the guarantee, but the risk in the present case was not significant. The Judge stated that such risks existed in most cases when a contracting party agrees to provide an unconditional bank guarantee, or a similar third party guarantee.

As to unconscionability, the Judge held that a claim would be unconscionable only if Contractors/Beneficiaries “did so for a collateral purpose, or if they did so knowing that they had not given the applicant the benefit of a contractual process to which the parties had agreed, or if they did so inconsistently with an expectation that they had reasonably raised in the [Subcontractor/Applicant].” The Judge noted that there was nothing in the facts indicating that Contractors/Beneficiaries had acted unconscionably.

Subcontractor/Applicant objected that Contractors/Beneficiaries had unreasonably delayed in filing the complaints and that Contractors/Beneficiaries had demanded more than their estimated loss. The Judge adjusted the amount to a lower figure.

In denying Subcontractor/Applicant’s injunctive relief, the Judge stated, “the parties have prima facie agreed that it is the beneficiary’s right to make that demand,” and observed that even a delay of the party’s right to make the demand still severely interfered with the Contractors/Beneficiaries’ right to demand.

TEXTS: Clause 2.6 of the Subcontract provided:

“2.6 Unconditional undertakings

“ (a) (General undertakings): Within 10 Business Days of the date of Contract Commencement, the Subcontractor must give Transcity 2 unconditional undertakings, each for 2.5% of the Subcontract Sum as security for the performance of the Subcontractor’s obligations under or in connection with this deed. If the Subcontract Sum increases by an amount greater than or equal to 10% of the Subcontract Sum (and on any future occasion that such additional increase occurs), Transcity may in its absolute discretion require the Subcontractor to provide further unconditional undertakings within 28 days so that the total of the 2 unconditional undertakings then held pursuant to this clause 2.6(a) equal 5% of the increased Subcontrct Sum.

“ (b) (Undertakings for unfixed goods and materials): The Subcontractor must give Transcity the unconditional undertakings as required from time to time by clause 12.6.

“ (c) (Requirements for undertakings): Each unconditional undertaking to be provided under this clause 2.6 must:

“ (i) be in the form of Schedule 2 (or such other form as Transcity may approve);

“ (ii) be in favour of Transcity;

“ (iii) subject to clause 2.6(c)(vii), be a continuing liability;

“ (iv) be at all times provided by a bank acceptable to Transcity that maintains the Required Rating;

“ (v) be payable at a branch office of the issuer in Brisbane (or such other place as Transcity may approve);

“ (vi) have an expiry date no earlier than the date the unconditional undertaking is required to be released under clause 2.6(e); and

“ (vii) where required by Law, be duly stamped.

“ (d) (Replacement of undertakings): If the issuer of an unconditional undertaking ceases to satisfy any of the requirements of clause 2.6(c), then the Subcontractor must:

“ (i) promptly notify Transcity of that circumstance; and

“ (ii) within 15 Business Days of being requested to do so, procure the issue to Transcity of a replacement unconditional undertaking which satisfies the requirements of clause 2.6(c).

“ (e) (Release of undertakings): Subject to clause 2.6(h) and its rights to have recourse to the unconditional undertakings, Transcity must:

“ (i) within 25 Business Days after the Date of Practical Completion, release one 2.5% unconditional undertaking >provided by the Subcontractor under clause 2.6(a) (or, if that undertaking has been converted to cash under clause 2.6(f), the amount held on trust under clause 2.6(f)(iii) in respect of that undertaking);

“ (ii) within 25 Business Days after the Date of Close-out, release the remaining 2.5% unconditional undertaking provided by the Subcontractor under clause 2.6(a) (or, if that undertaking has been converted to cash under clause 2.6(f), the amount held on trust under clause 2.6(f)(iii) in respect of that undertaking);

“ (iii) release the undertakings provided in accordance with clause 2.6(b) when required by clause 12.6(c) (or, if that undertaking has been converted to cash under clause 2.6(f), the amount held on trust under clause 2.6(f)(iii) in respect of that undertaking); and

“ (iv) release the balance of unconditional undertakings (or, if that undertaking has been converted to cash under clause 2.6(f), the amount held on trust under clause 2.6(f)(iii) in respect of that undertaking) then held 25 Business Days after the date 12 months after the Date of Close-out.

“ (f) (Transcity’s rights): Transcity:

“ (i) must have recourse to any unconditional undertaking provided under this clause 2.6 at any time to the extent of any bona fide claim notified in writing by Transcity to the Subcontractor which Transcity may have against the Subcontractor arising out of, or in connection with this deed or the work under this deed (including the Subcontract Works):

“ (ii) is not obliged to pay the Subcontractor interest on:

“ (A) any unconditional undertaking; or

“ (B) the proceeds of any unconditional undertaking if it is converted into cash; and

“ (iii) holds the proceeds referred to in clause 2.6(f)(ii) on trust for the Subcontractor, except to the extent Transcity is entitled to have recourse to those proceeds under clause 2.6(f)(i).

“ (g) (No injunction): The Subcontractor must not take any steps to injunct or otherwise restrain:

“ (i) any issuer of any unconditional undertaking provided under this clause 2.6 from paying Transcity pursuant to the unconditional undertaking;

“ (ii) Transcity from taking any steps for the purposes of making a demand under any unconditional undertaking provided under this clause 2.6 or receiving payment under any such unconditional undertaking; or

“ (iii) Transcity using the money received under any unconditional undertaking provided under this clause 2.6, except to the extent that Transcity fraudulently or unconscionably takes any steps for the purposes of making a demand under any unconditional undertaking.

“ (h) (Continuing): Despite any other provision of this deed to the contrary, where this deed may otherwise require Transcity to release an unconditional undertaking or this deed is terminated >by Transcity either pursuant to clause 14 or by reason of the Subcontractor repudiating this deed, Transcity may continue to hold the unconditional undertakings after the date for its release or the termination of this deed to the extent of any bona fide claim which Transcity may have against the Subcontractor arising out of, or in connection with, the deed or the ITS Activities whether for damages (including liquidated damages) or otherwise.

“ (i) (Expiring unconditional undertakings): If any unconditional undertaking provided under this clause 2.6 includes an expiry date that is a date prior to the date that the unconditional undertaking is required to be released by Transcity in accordance with this clause 2.6 (including clause 2.6(i)), then the Subcontractor must provide to Transcity’s Representative at least 20 Business Days before the expiry date of that unconditional undertaking a replacement unconditional undertaking that satisfies the requirements of clause 2.6(c) in exactly the same terms (except that any expiry date must not be less than 1 year from the current expiry date) and for the same amount as the unconditional undertaking it has replaced and this clause 2.6 will apply to the replacement unconditional undertaking.

“ (j) (Failure to replace expired unconditional undertakings): If the Subcontractor does not comply with clause 2.6(i), the Subcontractor agrees that, without limiting Transcity’s rights under this deed, Transcity may immediately convert into money the full amount of the relevant unconditional undertaking and hold that money as security pursuant to this deed until such time as the Subcontractor has provided an unconditional undertaking for the amount and in the form required by clause 2.6(i).”

[JWC]

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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.