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Note: CPB Contractors Pty Ltd (Subcontractor/Applicant) engaged JKC Australia Lng Pty Ltd (Contractor/Beneficiary) to perform engineering procurement, construction, and commissioning works related to the Ichthys LNG Project. Under the terms of the subcontract, Subcontractor/Applicant was required to obtain two performance bonds in favor of the contractor, which covered 10% of the total contract price.

Pursuant to a liquidation clause in the contract, Contractor/Beneficiary demanded payment for uncompleted work. Subcontractor/Applicant disputed Contractor/Beneficiary’s entitlement to the liquidated damages, and Contractor/Beneficiary gave notice of its intent to draw on the performance bonds. Subcontractor/Applicant then sued to enjoin Contractor/Beneficiary from drawing on the bonds pending a determination of the validity of Contractor/Beneficiary’s claims.

The trial judge dismissed Subcontractor/Applicant’s request for an interlocutory injunction, rejecting Subcontractor/Applicant’s “contention that the contractor’s right to call on the Bank Guarantees is conditioned upon the objective fact that an amount is payable on demand.”Subcontractor/Applicant appealed. On appeal, the Supreme Court of Western Australia the Court of Appeal, Buss P, Murphy, Beech, JJA., affirmed.

Subcontractor/Applicant argued that the trial judge erred (1) in denying the injunction because the bond dispute was subject to the dispute resolution process outlined in the subcontract, and (2) in not finding the term “payable” within GC 35.3(a) of the subcontract to mean only those funds objectively determined to be payable.

The appellate court agreed with the trial judge’s dismissal of Subcontractor/Appellant’s first argument, ruling that “[a] duty to cooperate cannot be imposed on a party so as to compel that party to bring about a circumstance or result which the contract does not require”. The appellate court further found that Contractor/Beneficiary had a right to have recourse to the guarantee at any time, and no duty of cooperation could be extended to impair that right.

The appellate court also rejected Subcontractor/Applicant’s second argument, and found the contract “entitle[d] the [Contractor/Beneficiary] to have recourse to the Bank Guarantees if at any time the [Contractor/Beneficiary] [had] an honest claim” under the subcontract. The court ruled that “due” and “payable” meant “any sum that a person is legally liable to pay, irrespective of whether the time for payment has arrived”.

Text: The Opinion provided several excerpts of the subcontract and performance bonds:

Subcontract Clause 35: Bank Guarantees

“Subcontractor thereby agrees to provide irrevocable guarantee(s) provided by an approved bank, insurance company or other financial institution (as the case may be) payable on first demand of the contractor and a Parent Company Guarantee to guarantee the due performance of the subcontractor’s obligations under the Subcontract as provided in the remaining part of GC 35. The irrevocable guarantees provided by an approved bank, insurance company or other financial institution are referred to in the Subcontract as Bank Guarantees.”

Subcontract Clause 35.1(a): Form of Bank Guarantees.

It provides that:

“(i)  … the Bank Guarantees must be capable of being drawn upon and enforced by Contractor in Australia.

…

(iii)  each Bank Guarantee must contain an unconditional and irrevocable undertaking by the Approved bank, insurance company or other financial institution (as the case may be) to pay to Contractor the amount of the security on demand without notice being given to Subcontractor by the bank, insurance company or other financial institution … each proforma in [Annexure 1A (form of Bank Guarantee) is approved].”

Subcontract Clause 35.1(b):

“Provides that the initial amount of the Bank Guarantee be 10% of the Subcontract price, to be provided as two guarantees: the Initial Bank Guarantee and the Warranty Bank Guarantee each equal to 5% of the price.”

Subcontract Clause 35.1(c):

“Provides for the duration of the Bank Guarantees. The Initial Bank Guarantee is required to be valid until the effective date of the last Provisional Acceptance Certificate issued pursuant to GC 19.3. The Warranty Bank Guarantee is required to be valid until 30 days after the expiry of the last Warranty Period, being the periods stipulated in GC 20.4. By GC 35.1(f) the contractor must return the Initial Bank Guarantee when the last Provisional Acceptance Certificate is issued, and must return the Warranty Bank Guarantee within 40 days after the expiry of the last Warranty Period.”

Subcontract Clause 35.3 provides as follows:

“(a)  Contractor may have recourse to the Bank Guarantee(s) at any time in order to recover any amounts that are payable by Subcontractor to Contractor on demand.

(b)  Subcontractor waives any right that it may have to obtain an injunction or any other remedy or right against any party in respect of Contractor having recourse to the Bank Guarantee(s).”

Subcontract Clause 35.4 Proceeds of Security as follows:

“(a)  If Contractor calls on a Bank Guarantee or a Parent Company Guarantee at any time, the balance of the proceeds (if any) after deducting amounts due and payable to Contractor by Subcontractor must be deposited by Contractor into an interest bearing account with an Australian bank (as defined in the Corporations Act 2001 (Cth)) in the name of Contractor.

(b)  Any interest accrued on the account balance must be retained by Contractor in the account and added to the balance of the proceeds held.

(c)  Contractor is entitled to withdraw from the account amounts due and payable to it by Subcontractor from time to time.

(d)  Neither Contractor nor the bank by whom the proceeds are held is to be deemed to hold the proceeds (or the balance thereof from time to time) on trust for Subcontractor, but Contractor must pay the balance in the account (if any), including all accrued interest, to Subcontractor on the expiry of the Warranty Period.”

Subcontract Clause 36

“Provides for liquidated damages to be payable by the subcontractor to the contractor in accordance with Exhibit B, Schedule of Compensation if the subcontractor fails to complete the relevant part of the Works by the relevant Completion Date or Milestone Date. Clause 5 of the Schedule of Compensation provides a daily rate of liquidated damages payable for each of the six stipulated completion events, in each case based on the absence of a Handover Certificate in relation to the relevant part of the Works.”

Subcontract Clause 36.1(b):

“‘Subject to Contractor’s rights and remedies provided for under Article 35, sub-Articles 36.3 to 36.5 and Article 50, the payment of liquidated damages under sub-Article 36.1(a) is the sole and exclusive financial remedy of Contractor in respect of Subcontractor’s failure to complete the relevant part of the Works by the Completion Date(s) or Milestone Date(s).’

Liquidated damages are agreed at 15% of the Subcontract price. Taking into account the amendment, the cap for liquidated damages is $39.225 million.”

Subcontract 36.3 Other obligations

“Without prejudice to sub-Article 36.1, the payment of liquidated damages under this Article 36 or elsewhere in the Subcontract does not prevent Contractor from exercising any other rights and remedies provided for under the Subcontract (including for the avoidance of doubt its rights under Article 20, sub-Article 35.3 and Article 50), and does not relieve Subcontractor from its obligations to diligently complete the Works…”

Subcontract 36.4 Genuine Pre-Estimate

“All amounts of such liquidated damages for which Subcontractor may become liable under the Subcontract are agreed to be a genuine pre estimate of the loss which may be sustained by Contractor in the event that Subcontractor fails to comply with the relevant obligation under the Subcontract and are not a penalty.”

Subcontract 36.5 Enforceability of liquidated damages

“lf liquidated damages are found not to be payable or the provisions in the Subcontract in relation to liquidated damages are found to be invalid or unenforceable for any reason, then the Parties agree that Subcontractor’s liability to Contractor will instead be for general damages at law for Subcontractor’s failure to comply with the relevant obligation which shall in no event exceed the amount of the Liquidated Damages calculated in accordance with the Subcontract.”

Subcontract Clause 57: Dispute Resolution

“(a) In the event of Dispute between the subcontractor and contractor, either party may give the other party a written notice adequately identifying the matters the subject of the Dispute.

(b) The parties must endeavour to settle by negotiation any Dispute and all the consequences thereof. The parties must confer at least once within 10 days of the notice of dispute to attempt to resolve the Dispute and failing resolution of the Dispute to explore alternative methods of resolving the Dispute. At any such conference each party must be represented by a person having authority to agree to a resolution of the Dispute.

(c) The parties will endeavour to settle such Dispute by negotiation within 35 days from receipt of the notice of Dispute.

(d) All Disputes are to be settled by final and binding arbitration. If the parties fail to settle the Dispute by negotiation within the period of time set out in sub-GC 57.3, either party may refer the Dispute to international arbitration in accordance with GC 57.”

Subcontract Clause 57(m)

“provides that neither party is prevented or restrained by GC 57 from applying to a court to seek urgent relief (including injunction or conservatory measures).”

“The proforma Bank Guarantee includes the following provisions:

‘2.  The Financial Institution hereby irrevocably and unconditionally undertakes to pay to the Contractor, forthwith upon written demand from the Contractor, any amount specified in such demand, which when aggregated with all such amounts previously paid under this document does not exceed the Guaranteed Amount.

  The Financial Institutions’ obligation to make payment under this document shall arise on receipt of a demand without proof of any breach or any other conditions and [#PARA_INDENT#]notwithstanding any contest or dispute by the Subcontractor. The Financial Institution shall not be required or permitted to make any other investigation or enquiry or notify the Subcontractor prior to the satisfaction of the demand.

…

6.  The obligations of the Financial Institution under this document act as primary obligor and not by way of surety. The Financial Institution shall not be entitled as against the Contractor to make any withholding or deduction on account of any set-off or counterclaim whatsoever and howsoever arising.’”

[MMY]

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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.