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Note: Saipem Australia Pty Ltd (Contractor/Applicant) contracted with GLNG Operations Pty Ltd (Gas Plant/Beneficiary) to build a natural gas pipeline. Contractor/Applicant obtained a “bank guarantee” for the benefit of Gas Plant/Beneficiary. The contract enabled Gas Plant/Beneficiary to direct Contractor/Applicant to rectify any defects in the pipeline. If Contractor/Applicant did not comply, Gas Plant/Beneficiary would, after giving notice, remedy the defect at Contractor/Applicant’s expense. Gas Plant/Beneficiary could then set off expenses from future payments to Contractor/Applicant or could draw on the bank guarantee to recover any debts or loss resulting from default by Contractor/Applicant.

Gas Plant/Beneficiary gave notice alleging a defect in the pipeline and directing Contractor/Applicant to rectify it. The notice also stated that if Contractor/Applicant did not rectify the defect, Gas Plant/Beneficiary would hire a third party to do so at Contractor/Applicant’s expense. Subsequently, Gas Plant/Beneficiary sent monthly letters to Contractor/Applicant for 10 months advising it of the amounts incurred in the rectification process. Later, Gas Plant/Beneficiary sent Contractor/Applicant a final notice of the “actual and demonstrable costs of rectification work”, which totaled AUD 3,292,928.98. Gas Plant/Beneficiary then attempted to draw on the bank guarantee.

Contractor/Applicant sued Gas Plant/Beneficiary to enjoin it from drawing on the bank guarantee. The Supreme Court of Queensland, Holmes, C.J., denied the application for an interlocutory injunction and ordered Contractor/Applicant to pay Gas Plant/Beneficiary’s costs.

Contractor/Applicant claimed that an injunction was appropriate because Gas Plant/Beneficiary did not give notice according to the requirements of section 67J of the Queensland Building and Construction Commission Act of 1991. Additionally, Contractor/Applicant argued that Gas Plant/Beneficiary was not exempt from giving notice under section 67J(4), which states that notice within 28 days is not necessary when the contracting party takes the work out of the hands of the contracted party. Gas Plant/Beneficiary claimed that it had provided the necessary notice within 28 days in the form of the 10 monthly statements and one final notice of outstanding rectification costs. Furthermore, Gas Plant/Beneficiary argued that it fell under the exception of 67J(4) because it took the repair of the natural gas pipeline out of the hands of Contractor/Applicant.

The Judge ruled that Gas Plant/Beneficiary was exempt under section 67J(4) and, even if it was not, it provided the required notice. Although the Judge did not believe that section 67J extended to unliquidated damages, he accepted that there was a plausible argument on the matter and evaluated the case as if section 67J did extend to unliquidated damages. Therefore, if section 67J did apply, the Judge ruled that the final notice, which identified the costs of rectification work, both created the debt and constituted section 67J notice, and the 10 letters created a series of debts and gave the necessary notice as well. Based on the above reasoning, the Judge concluded that Gas Plant/Beneficiary gave the appropriate notice in order to draw on the bank guarantee.

Further, the Judge ruled Gas Plant/Beneficiary was exempt from providing notice under section 67J(4) because it was reasonable to interpret the provision as intending that the contracting party should have access to the bank guarantee unconstrained by the notice requirement once the contracting party had assumed responsibility for any piece of work and its cost. Section 67J(4) created an exception, which stated that the notice within 28 days is not necessary when “work has been taken out of the hands of the contracted party”. Contractor/Applicant contended this section was referring to a situation where the contracting party takes away the work from a contractor as an alternative to terminating the contract. Gas Plant/Beneficiary countered that it would not make sense to limit the section to apply only in cases where the whole of the works contemplated by the contract had been handed over to a third party. The Judge agreed with Gas Plant/Beneficiary.

The Judge also concluded that the balance of convenience tipped in favor of Gas Plant/Beneficiary. Contractor/Applicant claimed that a draw on its bank guarantee would harm its credit rating and ability to obtain finance or other bank guarantees, which would cause a loss of competitiveness in bidding for future contracts. Gas Plant/Beneficiary countered that Contractor/Applicant could easily avoid any reputational damage by paying the amount owed to Gas Plant/Beneficiary. Records indicated that Contractor/Applicant had sufficient funds to do so, and that Contractor/Applicant had also made a covenant that it would not seek to restrain Gas Plant/Beneficiary from exercising its rights regarding bank guarantees. However, because Gas Plant/Beneficiary fell within the exception under section 67J(4) and because, even if it had not fallen within the exception, it gave appropriate notice, the Judge did not take the covenant into account in considering the balance of convenience.

[VLG]

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