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Note: In 2013, H Troon Pty Ltd. (Contractor/Applicant) agreed with Marysville Hotel and Conference Center (Hotel Company/Beneficiary) to construct a hotel and conference center. WT Partnership (Certifying Superintendent) was appointed to certify practical completion and final certification, and Hotel Company/Beneficiary appointed Metier 3 (Non-Certifying Superintendent) to provide architectural design services and other related matters. Pursuant to the contract, Contractor/Applicant obtained two unconditional bank guarantees from Westpac Banking Corporation (Issuer)in favor of Hotel Company/Beneficiary totaling AUD 1.5 million, each in the amount of AUD 750,000, to assure completion.

When practical completion was achieved and pursuant to the contract, Hotel Company/Beneficiary returned one bank guarantee to Contractor/Applicant. Contractor/Applicant then submitted its last invoice to Hotel Company/Beneficiary. Pursuant to the Contract, the Defects Liability Period continued for 12 months after practical completion. After this period, Contractor/Applicant asserted that it had submitted its Final Payment Claim to Non-Certifying Superintendent and Certifying Superintendent, requesting that the second bank guarantee be returned. Hotel Company/Beneficiary claimed Certifying Superintendent had not received Contractor/Applicant’s Final Payment claim and that there were substantial outstanding defects. Consequently, Hotel Company/Beneficiary made a demand upon the second bank guarantee for AUD 750,000.

After Hotel Company/Beneficiary’s demand on the bank guarantee, Contractor/Applicant obtained anex parte interim injunction restraining Hotel Company/Beneficiary from calling upon or making a demand on the second bank guarantee. By further orders, the court continued the injunction and ordered Contractor/Applicant to pay Hotel Company/Beneficiary AUD 240,000 plus GST (totaling AUD 264,000).Contractor/Applicant then electronically transferred AUD 264,000 as required by the court and subsequently AUD 61,875.40 in response to Hotel Company/Beneficiary’s invoice for damages (AUD 76,000) minus Contractor/Applicant’s Final Payment claim (AUD 14,124.60).

The court postponed the Contractor/Applicant’s application seeking interlocutory and permanent injunctions, restraining Hotel Company/Beneficiary from making demand upon the second bank guarantee. The Supreme Court of Victoria, Digby, J., then dismissed Contractor/Applicant’s application for permanent interlocutory injunctive relief.

Contractor/Applicant claimed the Certifying Superintendent did not issue the Final Certificate within 14 days of Contractor/Applicant’s Final Payment Claim or 28 days after the expiration of the Defects Liability Period. Contractor/Applicant further claimed Hotel Company/Beneficiary breached the Contract by not ensuring that the Superintendent issued the Final Certificate; therefore, this breach by Hotel Company/Beneficiary prevented issue of the Final Certificate and enabled Hotel Company/Beneficiary to access the security guarantee.

Contractor/Applicant also argued Hotel Company/Beneficiary’s conduct was a breach of contract and unconscionable because (1) Hotel Company/Beneficiary tried to demand more than a justifiable amount from the bank guarantee; and (2) Hotel Company/Beneficiary tried to make a demand that was only possible because Hotel Company/Beneficiary breached the Contract and ensured that the Certifying Superintendent did not issue the Final Certificate.

Hotel Company/Beneficiary responded by listing various actions that justified a drawing. First, Contractor/Applicant never submitted the Final Payment Claim to Certifying Superintendent and there were substantial defects, particularly leaks in the fire system piping, which would have led to a Note of Dispute pursuant to the Contract. Contractor/Applicant was not entitled to the Final Certificate under the Contract, and would not have been awarded one under the circumstances. Additionally, the Contract only permitted recourse to the part of security provided by Contractor/Applicant “to pay for any costs, expenses, loss or damage which the principal claims to have incurred or might in the future incur”. Therefore, Hotel Company/Beneficiary claimed it was entitled to draw on the second bank guarantee only for its losses (AUD490,153.26), not AUD750,000.Hotel Company/Beneficiary argued that the risk as to who was to be out of pocket pending resolution of a dispute was allocated and agreed to fall on Contractor/Applicant.

The Judge evaluated whether Hotel Company/Beneficiary was acting unconscionably and should therefore have been prevented from drawing upon the bank guarantee (i.e. serious misconduct on something clearly unfair or unreasonable). Secondarily, the Judge evaluated whether Hotel Company/Beneficiary breached the Contract.

The Judge noted that courts generally will not enjoin the beneficiary of a bank guarantee, except:

“(a) where fraudulent conduct justifies restraining a party in whose favour a performance guarantee has been provided;

(b) in circumstances where relevant unconscionable contravention of the Competition and Consumer Act 2010…justifies restraining a party in whose favour a performance guarantee has been provided; and

(c) where the beneficiary of the performance guarantee seeks recourse in circumstances where such recourse constitutes a breach of the beneficiary’s contractual promise not to call on the performance guarantee.”

The Judge ruled that the Contract indicated that the parties intended to allocate the risk of a relevant dispute onto the Contractor/Applicant pending its resolution. The Judge based this conclusion on the promise in the Contract calling for a performance guarantee in an “unconditional” form, and that the bank “unconditionally undertakes to pay on demand” such a demand when the demand was “without reference to the [plaintiff]”. Therefore, the Judge rejected Contractor/Applicant’s assertion that there was a contractual constraint on Hotel Company/Beneficiary’s ability to make a demand on the bank guarantee.

In reference to the alleged unconscionable conduct, the Judge did not believe that Hotel Company/Beneficiary tried to demand for an amount to which it was not entitled. Moreover, the Judge concluded that Hotel Company/Beneficiary had a reasonable basis to assert that Contractor/Applicant breached the Contract by failing to attend to formally notified defects.

The Judge found that the disputes were no more than “foreseeable common disputations”, for which the Contract permitted a demand upon the unconditional bank guarantee. Therefore, the Judge dismissed Contractor/Applicant’s application for permanent interlocutory injunctive relief.

Comment: The court notes that the Contract’s clauses allocate the risk of disputes in the favor of the beneficiary. It is odd that the court should have focused on this issue instead of the selection of an independent undertaking. It was that choice that allocated the risk.

[VLG]

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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.