FEDERAL COURT OF AUSTRALIA

Fabtech Australia Pty Ltd v Laing O’Rourke Australia Construction Pty Ltd [2015] FCA 1371

THE COURT ORDERS THAT:

1.    The applicant’s application for an interlocutory injunction be refused and the respondent be released from the undertaking it gave on 2 November 2015.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

1    This is an application by the applicant for an interlocutory injunction restraining the respondent from having recourse to two bank guarantees in relation to certain claims made by the respondent against the applicant. The bank guarantees were provided by the applicant pursuant to a Subcontract Agreement between the applicant and the respondent and they were given by the applicant’s banker, the National Australia Bank Limited (“National Bank”), on 4 September 2013 (“the Bank Guarantees”). After an ex parte hearing on 28 October 2015, I granted the injunction sought by the applicant. On 2 November 2015, I heard full submissions from the applicant and the respondent on the issue of whether an interlocutory injunction should be granted and I reserved my decision. The applicant provided the usual undertaking as to damages, and the respondent by its counsel gave an undertaking in terms of the injunction previously granted until judgment was given on the applicant’s application for an interlocutory injunction.

2    For the reasons set out below, I have reached the conclusion that the applicant’s application for an interlocutory injunction should be refused and the respondent should be released from its undertaking.

3    The applicant as the Subcontractor and the respondent as the Contractor entered into a Subcontract Agreement on 15 July 2013 in connection with a project involving the construction of a Northern Water Treatment Plant and Associated Infrastructure near Wandoan in Queensland. Under the Subcontract Agreement, the applicant undertook to supply and install pond liners and leak detection systems for two water treatment ponds. The applicant’s work under the Subcontract Agreement was divided into two separable portions. Separable Portion 1 (“SP1”) involved a 1200 ml Clarified Water Pond and the Date for Substantial Completion was 30 March 2014, later extended on an interim basis to 19 April 2014. The evidence in the case establishes that the Date of Substantial Completion was 19 June 2014. Under the Subcontract Agreement, the Date of Substantial Completion is the date upon which the Contractor’s Representative is reasonably satisfied that Substantial Completion has been achieved. The Subcontract Agreement provided for the provision of bank guarantees or the retention of monies. In this case, bank guarantees were provided. In the case of bank guarantees, the Subcontract Agreement provided that two guarantees for 10% of the Subcontract Sum were to be provided in relation to SP1. One of the Bank Guarantees provided was released on substantial completion as provided by the Subcontract Agreement. The other Bank Guarantee is the subject of the applicant’s application for an interlocutory injunction. Separable Portion 2 (“SP2”) involved a 600 ml Reverse Osmosis Reject Pond and the Date for Substantial Completion was 30 June 2014. The evidence in this case establishes that the Date of Substantial Completion was 6 September 2014. The Subcontract Agreement provided for the provision of bank guarantees or the retention of monies. In this case, bank guarantees were provided. In the case of bank guarantees, the Subcontract Agreement provided that two guarantees for 10% of the Subcontract Sum were to be provided in relation to SP2. One of the Bank Guarantees provided was released on substantial completion as provided by the Subcontract Agreement. The other Bank Guarantee is the subject of the applicant’s application for an interlocutory injunction. The total amount of the two extant Bank Guarantees is $1,121,146.33.

4    The applicant commenced work in July 2013.

5    The Subcontract Agreement fell within the terms of the Building and Construction Industry Payments Act 2004 (Qld) (“the Act”). Pursuant to s 17 of the Act, the applicant made a payment claim dated 13 April 2015 and that payment claim was served on the respondent on 14 April 2015. The payment claim was disputed by the respondent by way of a payment schedule served on the applicant and dated 28 April 2015. The applicant’s payment claim went to adjudication under s 21 of the Act and on 16 September 2015, the adjudicator made a decision in the applicant’s favour awarding it an amount of $4,019,863.73 plus interest and 75% of the adjudicator’s costs. On 25 September 2015, the respondent commenced proceedings in the Supreme Court of Queensland seeking a declaration that the adjudication decision was void. On 16 October 2015, the respondent discontinued its proceeding in the Supreme Court and the applicant was paid the amount which had been awarded to it.

6    On 27 October 2015, the respondent wrote to the applicant summarising various claims “for the purposes of clause 6.2 of the Subcontract”. That clause provides for recourse to the Bank Guarantees and is set out below (at [8]). First, the respondent claimed that it had made overpayments to the applicant in the sum of $3,720,916.15 and it sought to recover that amount. The overpayments represented the amount or part of the amount paid to the applicant under the adjudicator’s decision. The respondent’s case is that the adjudicator erred. I will refer to this claim as the recovery claim. One element of the recovery claim is an amount for “leak detection” of $2,533,069.71. In relation to that amount, the respondent claimed that it was entitled to recover the amount as an overpayment and, in addition, as damages for misleading or deceptive conduct under s 18 of the Australian Consumer Law (Schedule 2 to the Competition and Consumer Act 2010 (Cth)). Secondly, the respondent claimed an amount of $2,218,930.54 for liquidated damages. The claim for liquidated damages comprises an amount of $1,049,261.73 for a delay period of 61 days in relation to SP1, and an amount of $1,169,668.81 for a delay period of 68 days in relation to SP2. The claim for liquidated damages alone exceeds the amount of the Bank Guarantees. I will refer to this claim as the liquidated damages claim. In the letter dated 27 October 2015, the respondent gave the applicant 24 hours’ notice of its intention to call on the Bank Guarantees.

7    The evidence establishes that the first time the respondent made its claim for liquidated damages was in its letter dated 27 October 2015. The respondent did not raise such a claim when its representative decided he was reasonably satisfied that Substantial Completion had occurred (i.e., Date of Substantial Completion). Nor was the claim raised before the adjudicator. The adjudicator did consider delay in the progress of the Subcontract because the applicant claimed stand-down costs as part of its claim. The respondent relied on an expert’s report from Tracey Brunstrom & Hammond Pty Ltd before the adjudicator, and the applicant pointed to the fact the respondent’s expert concluded that the applicant was responsible for a delay of 7.32 days (Executive Summary, paragraph 20).

8    The Bank Guarantees were provided pursuant to cl 6 of the Subcontract Agreement and that clause provides as follows, relevantly:

6.    Retention

6.1    Amount and time for Provision

The Contractor will be entitled to retain from any payment made under the Subcontract or otherwise, the percentage stated in Item 12 of Schedule 1 of the Subcontract.

The Contractor may accept the provision by the Subcontractor of Bank Guarantees in lieu of retention for the amount stated in Item 12 of Schedule 1 of the Subcontract.

Without limiting the Contractor’s discretion to approve the terms of a Bank Guarantee not provided in the form set out in Schedule 8, if the Subcontractor provides a Bank Guarantee that has an expiry date, the Subcontractor must replace the Bank Guarantee with another Bank Guarantee on the same terms no later than 45 days before its expiry. If the Subcontractor fails to replace a Bank Guarantee no later than 45 days before its expiry, the Contractor may convert the Bank Guarantee to cash.

6.2    Recourse to Bank Guarantees and Retention

The Contractor may have recourse to the Bank Guarantees or any sum retained pursuant to the preceding clause whenever the Contractor claims to be entitled to claim the payment of monies by the Subcontractor.

6.3    Release of Bank Guarantees

Subject to clause 6.5, within 10 working days after the later of the Date of Substantial Completion and date of Practical Completion for the whole of the Head Contract Works, the Contractor will release the percentage stated in Item 13 of Schedule 1 of the Bank Guarantees then held. The Contractor will release the balance promptly once the Subcontractor’s obligations are complete and the Defects Liability Period has expired.

6.4    Release of Retention

Subject to clause 6.5, within 10 working days after the later of the Date of Substantial Completion and the date of Practical Completion for the whole of the Head Contract Works, the Contractor will release the percentage stated in Item 14 of Schedule 1 of any amount then held which has been retained under clause 6.1.

Subject to clause 6.5, within 10 working days after the Contractor’s Representative issues a Final Certificate under clause 14.16, the Contractor will release the balance of any amount held which has been retained under clause 6.1.

6.5    Unsatisfied Claims

If, at any time when the Contractor is required to release Bank Guarantees or retention money to the Subcontractor, the Contractor considers it has any unpaid moneys due or unsatisfied claims against the Subcontractor, the Contractor shall only be obliged to release the Bank Guarantee or retention moneys to the extent that the aggregate of the Bank Guarantee and the retention moneys exceeds the aggregate of:

(a)    the amount the Contractor is otherwise still entitled to retain under the Subcontract; and

(b)    the amount of the Contractor’s unpaid moneys due and unsatisfied claims,

but the Contractor shall release the excess amount of Bank Guarantee and/or retention moneys held under this clause (if any), within 10 working days of the unpaid moneys due and unsatisfied claims being paid or satisfied.

…

9    On the face of it, cl 6.2 is not conditional on the respondent acting reasonably or establishing that it has a good claim. Nevertheless, the applicant submits that the provision of the Bank Guarantees acts as the provision of security and not as a risk allocation device as to which party should be out of pocket pending the resolution of a dispute. It points to the fact that the definition of “Bank Guarantees” in cl 1.1 of the Subcontract Agreement refers to the provision of the guarantees from an institution approved by the respondent “for the purpose of ensuring the [applicant’s] performance of the Subcontract”. I reject that submission. I do not think the definition has the effect of providing that the Bank Guarantees had effect as security, and not as security and as a risk allocation device, but even if it could be construed in that way, it could not prevail over the clear terms of cl 6 and the Bank Guarantees which were in the form provided in the Subcontract Agreement.

10    The contractual provisions in this case are in clearer terms than they were in Clough Engineering Limited v Oil and Natural Gas Corporation Limited [2008] FCAFC 136; (2008) 249 ALR 458 (“Clough Engineering”). In other words, it is even plainer in this case that the Bank Guarantees are a risk allocation device as to which party should be out of pocket pending the resolution of a dispute (Clough Engineering at 482 [99]). It may also be noted that this is not a case where there is an express requirement that the beneficiary of the Bank Guarantees act reasonably in seeking recourse to the Bank Guarantees as there was in Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [2015] VSCA 98 (“Sugar Australia”).

11    Both parties accept that I must consider whether the applicant has established a prima facie case in the sense identified by Gummow and Hayne JJ in Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57 at 81-82 [65] (see also Gleeson CJ and Crennan J at 68-69 [19]) and that the balance of convenience favours the grant of an injunction.

12    The applicant relies on four grounds in support of its claim that it had a prima face case in the relevant sense. First, it submits that the respondent’s recovery claim and liquidated damages claim do not fall within the terms of cl 6.2 of the Subcontract Agreement. Secondly, it submits that to the extent that cl 6.2 may otherwise enable the respondent to have recourse to the Bank Guarantees, it is void in the circumstances of this case because it purports “to annul, exclude, modify, restrict or otherwise change the effect of a provision” of the Act within s 99 of the Act. Thirdly, it submits that having regard to the circumstances it identified, it would be unconscionable within s 20 of the Australian Consumer Law for the respondent to have recourse to the Bank Guarantees. Finally, the applicant submits that for the same reasons it relies on in support of its third argument, to allow the respondent to have recourse to the Bank Guarantees would breach the respondent’s implied obligation to act in good faith.

13    For the reasons which follow, I am not satisfied that the applicant has established a prima facie case in the relevant sense.

1.    Are the claims made by the respondent within the terms of cl 6.2?

14    The Subcontract Agreement contains a form (Schedule 8) for the Bank Guarantee to be provided under the agreement.

15    The Bank Guarantees were provided in accordance with the form set out in Schedule 8. They are in wide terms. For example, clauses 1 and 2 in each guarantee are as follows:

1.    In consideration of the Beneficiary agreeing at the request of the Customer and the Bank to accept this guarantee in connection with the Agreement, the Bank undertakes to pay the Beneficiary an amount or amounts not exceeding the Amount in total.

2.    Payment of the Amount or any part or parts of the Amount will be made by the Bank to the Beneficiary:

a)    upon the Bank receiving at any NAB branch located within Australia while this guarantee remains in force an unconditional written demand from the Beneficiary accompanied by this guarantee; and

b)    whether or not the Bank gives prior notice of the payment to the Customer; and

c)    despite any notice given to the Bank by the Customer not to pay to the Beneficiary any moneys payable under this guarantee; and

d)    irrespective of the performance or non-performance by the Customer or the Beneficiary of the Agreement in any respect; and

e)    with no obligation on the Bank to enquire as to the performance or non-performance of the Agreement in any respect by the customer or Beneficiary; and

f)    with no obligation on the Bank to enquire as to the correctness or validity of any demand pursuant to subclause 2(a) of this clause;

g)    at the Bank’s election in cash, bank cheque or funds transfer into the beneficiary’s nominated account.

Under cl 6.2 of the Subcontract Agreement, the Contractor is entitled to have recourse to the Bank Guarantees whenever it claims to be entitled to claim the payment of monies by the Subcontractor.

16    The applicant advanced two submissions, one of which related to the recovery claim, including the claim for misleading or deceptive conduct, and the other related to liquidated damages claim. An important matter to note at the outset is that the applicant’s counsel accepted that neither of the two arguments preclude the respondent from pursuing its two claims by way of a proceeding in a court or by way of arbitration if that is appropriate.

17    I start with the recovery claim. The applicant submits that it is not a claim within cl 6.2 because it seeks the recovery of monies and it is not directly related to the performance of the Subcontract Agreement. Again, reference was made to the definition of Bank Guarantees in cl 1.1 (see paragraph 9 above). I reject this submission. Monies paid to the Subcontractor (i.e., the applicant) by the Contractor (i.e., the respondent) relate to the Subcontractor’s performance under the Subcontract Agreement and I think a claim for the payment of monies by the Subcontractor includes a claim for the repayment of monies by the Subcontractor. The definition of “Claim” or “Claims” in cl 1.1 and the ability of the Contractor to refuse to release the Bank Guarantees because of unsatisfied claims it has (cl 6.5), supports this construction.

18    Turning to the liquidated damages claim, the applicant submits that this is not a claim within cl 6.2 because the procedure in cl 14 of the Subcontract Agreement has not been followed with respect to this claim. It is necessary to outline the relevant provisions of this clause.

19    Clause 14.1 contains provisions dealing with the Subcontract Sum, being the amount identified in item 6 of Schedule 1 of the Subcontract Agreement which schedule contains Subcontract Particulars. Clause 14.2 deals with the circumstances in which and the times at which the applicant is entitled to make claims for payment described as progress claims. Such claims may be made:

(1)    on a monthly basis by the 25th of each month until the Date of Substantial Completion;

(2)    on the last day of the month immediately following the Date of Substantial Completion; and

(3)    after the expiry of the Defects Liability Period and other events identified in cl 14.15 have occurred.

20    Clause 14.3 deals with the issue of a payment certificate by the Contractor’s Representative which may show an amount to be paid to the Subcontractor or an amount due from the Subcontractor.

21    Clause 14.4 deals with the time for payment.

22    Clause 14.5 deals with the amount of payment and is in the following terms:

14.5    Amount of Payment

Subject to the provisions of this Subcontract, the amount due under this clause 14 may include the Contractor’s Representative’s assessment of:

(a)    the gross value of the Works carried out by the Subcontractor in accordance with the Subcontract as at the date of:

(i)    the progress claim pursuant to clause 14.1; or

(ii)    the Final Payment Claim pursuant to clause 14.15,

as the case may be;

(b)    amounts already paid to the Subcontractor for Works covered by the progress claim;

(c)    amounts the Contractor may be entitled to deduct or withhold or suspend pursuant to the Subcontract or otherwise, including any amount which is a Debt Due from the Subcontractor to the Contractor;

(d)    any amounts deducted for omitted work;

(e)    any amounts to be deducted in accordance with clause 14.26;

(f)    any cost to the Contractor of performing an obligation which the Subcontractor has failed to perform;

(g)    any other amounts already paid under the Subcontract; and

(h)    subject to clause 14.11, any amounts for unfixed materials and goods.

23    I can move to cl 14.7 which deals with the calculation of progress payments and is in the following terms:

14.7    Calculation of Progress Payments

Despite any other provision of the Subcontract, in calculating any progress payment to which the Subcontractor is entitled to in relation to the Subcontract:

(a)    the following amounts must not be included:

(i)    any amount which the Subcontract provides cannot be claimed or is not payable because of the failure by the Subcontractor to take any action (including to give any notice to the Contractor or the Contractor’s Representative);

(ii)    any amount which represents damages claimed against the Contractor (whether for breach of contract, in tort or otherwise);

(iii)    any amount which the Subcontract provides is not payable until certain events have occurred or conditions have been satisfied, to the extent those events have not occurred or those conditions have not been satisfied; or

(iv)    any amount in respect of which the obligation of the Contractor to make payment has been suspended under the Subcontract; and

(b)    any amounts which:

(i)    have become due from the Subcontractor to the Contractor under the Subcontract;

(ii)    the Contractor is entitled under the Subcontract to set off against the progress payment; or

(iii)    the Contractor is entitled under the Subcontract to withhold, deduct or retain from the progress payment,

are to be deducted.

Where the Subcontractor delivers a payment claim under the BCIP Act, the Subcontractor must, at the same time as that claim is delivered to the Contractor, deliver a copy to the Contractor’s Representative.

24    Clause 14.14 provides that payments by the Contractor to the Subcontractor will be payment on account only.

25    Clause 14.26 gives the Contractor the right to set-off monies or withhold monies. Paragraph (a) is in the following terms:

14.26    Set-Off / Withholding Payment

(a)    Without limiting the Contractor’s rights under this Subcontract, the Contractor may set-off from any monies due, or reasonably anticipated by the Contractor to become due, to the Subcontractor pursuant to this Subcontract (including any retention monies or security) any debt, amount, claim for damages or any other entitlement (including under an indemnity) the Contractor may have against the Subcontractor arising from or incidental to the work under the Subcontract, the terms and conditions of the Subcontract or arising from or incidental to the execution of any other works by the Subcontractor for the Contractor or the terms of any other agreement between the Contractor and the Subcontractor.

26    Clause 15.8 provides that the Subcontractor gives certain releases on the Date of Substantial Completion. It provides as follows:

15.8    Release of Claims at Substantial Completion

On the Date of Substantial Completion, the Subcontractor agrees to irrevocably release and discharge the Contractor, its officers, employees and agents from all Claims whether under the Subcontract, or tort, under statute or otherwise at law, arising out of or in any way connected with the Subcontract or the Works which the Subcontractor has or may have had against the Contractor on the Date of Substantial Completion with the exception of:

(a)    any amounts shown in a Payment Certificate as due or to become due; and

(b)    any Claim for which the Subcontractor has served a valid notice of dispute under clause 21.1.

27    Finally, cl 15.3 deals with the Contractor’s right to claim liquidated damages for late completion. It provides as follows:

15.3    Damages for Late Completion

(a)    If the Subcontractor fails to achieve Substantial Completion of each Separable Portion by the Date for Substantial Completion for that Separable Portion the Subcontractor shall pay the Contractor liquidated damages at the rate set out in Item 28 of Schedule 1 for every calendar day after the Date for Substantial Completion until the Date of Substantial Completion or the date the Subcontract is terminated under clause 20, whichever occurs first. Without limiting any other right or remedies the Contractor may have, the Contractor may deduct any such moneys from moneys due or to become due to the Subcontractor pursuant to the Subcontract or otherwise. Such liquidated damages shall become a Debt Due from the Subcontractor to the Contractor.

(b)    The parties agree that the rate of liquidated damages set out in Item 28 of Schedule 1 is a genuine pre-estimate of the Contractor’s damages.

(c)    Nothing in this clause excludes the Contractor’s right to claim general damages if the Contractor is not entitled to claim liquidated damages for any reason. Such general damages shall become a Debt Due from the Subcontractor to the Contractor.

(d)    The payment or deduction of any liquidated damages pursuant to this clause 15.3 or elsewhere in this Subcontract shall not relieve the Subcontractor from its obligations to complete the Works or any of its other obligations and liabilities under the Subcontract.

(e)    Notwithstanding any operation of the Plant by the Subcontractor prior to Substantial Completion in respect of the Works (or the relevant Separable Portion as the case may be), the parties agree that:

(i)    the Plant and the Works shall remain at the Subcontractor’s risk until such time as Substantial Completion occurs; and

(ii)    the Defects Liability Period for the Works (or the relevant Separable Portion as the case may be) shall not commence until the Contractor confirms that Substantial Completion has occurred.

28    I reject the submission that the liquidated damages claim cannot form the basis of a claim under the Bank Guarantees because the liquidated damages were not claimed by the respondent as part of the procedure under cl 14. The respondent could have claimed the liquidated damages as a set-off, but it was not bound to do so. There is nothing to suggest that the respondent must make all the claims it has under that procedure under cl 14, and cl 15.3 makes it clear that the liquidated damages are a debt due from the Subcontractor. More fundamentally, it is accepted that the respondent may bring the liquidated damages claim in a court or arbitration proceeding, and I cannot see anything in cl 14 and the Subcontract Agreement generally which indicates that, although it could do that, such a claim could not lead to recourse under the Bank Guarantees.

2.    Is cl 6.2 void on the ground that it purports to annul, exclude, nullify, modify, restrict or otherwise change the effect of a provision of the Act?

29    The applicant submits that, in the circumstances, recourse to the Bank Guarantees in relation to the recovery claim would be inconsistent with the policy of the Act. The applicant had an entitlement to be paid the amount determined by the adjudicator and it has, in fact, been paid that amount. The applicant submits that the policy of the Act is that it be entitled to retain that amount until there is a decision of a court or tribunal to the contrary. The applicant submits that that policy is reflected in s 99 of the Act. The applicant submits that recovering the amounts under Bank Guarantees “undermines the whole process under the Act”. The applicant referred to the object of the Act which is to ensure that a person is entitled to receive, and is able to recover, progress payments if the person undertakes to carry out construction work under a construction contract or undertakes to supply related goods and services under a construction contract (s 7). Section 8 deals with how the object is to be achieved and is in the following terms:

8    How object is to be achieved

8    The object is to be achieved by—

(a)    granting an entitlement to progress payments whether or not the relevant contract makes provision for progress payments; and

(b)    establishing a procedure that involves—

the making of a payment claim by the person claiming payment; and

the provision of a payment schedule by the person by whom the payment is payable; and

the referral of a disputed claim, or a claim that is not paid, to an adjudicator for decision; and

the payment of the progress payment decided by the adjudicator.

30    This submission by the applicant related primarily to the recovery claim. The adjudicator had not considered a liquidated damages claim by the respondent, although he did consider various delays in the context of the applicant’s claims. I do not need to consider whether this second ground covers the liquidated damages claim as well as the recovery claim because I reject the ground.

31    Section 29(1) of the Act places an obligation on a respondent to pay the adjudicated amount. In this case, the respondent has done that. Sections 99 and 100 of the Act relevantly provide as follows:

99    No contracting out

(1)    The provisions of this Act have effect despite any provision to the contrary in any contract, agreement or arrangement.

(2)    A provision of any contract, agreement or arrangement (whether in writing or not) is void to the extent to which it—

(a)    is contrary to this Act; or

(b)    purports to annul, exclude, modify, restrict or otherwise change the effect of a provision of this Act, or would otherwise have the effect of excluding, modifying, restricting or otherwise changing the effect of a provision of this Act; or

(c)    may reasonably be construed as an attempt to deter a person from taking action under this Act.

100    Effect of pt 3 on civil proceedings

(1)    Subject to section 99, nothing in part 3 affects any right that a party to a construction contract—

(a)    may have under the contract; or

(b)    may have under part 2 in relation to the contract; or

(c)    may have apart from this Act in relation to anything done or omitted to be done under the contract.

(2)    Nothing done under or for part 3 affects any civil proceedings arising under a construction contract, whether under part 3 or otherwise, except as provided by subsection (3).

(3)    In any proceedings before a court or tribunal in relation to any matter arising under a construction contract, the court or tribunal—

(a)    must allow for any amount paid to a party to the contract under or for part 3 in any order or award it makes in those proceedings; and

(b)    may make the orders it considers appropriate for the restitution of any amount so paid, and any other orders it considers appropriate, having regard to its decision in the proceedings.

…

32    In RJ Neller Building Pty Ltd v Ainsworth [2008] QCA 397, Keane JA (with whom Fraser JA and Fryberg J agreed) said the following in relation to the purpose of the Act (at [39]-[40]):

It is evidently the intention of the BCIP Act, and, in particular, s 31 and s 100 to which reference has been made, that the process of adjudication established under that Act should provide a speedy and effective means of ensuring cash flow to builders from the parties with whom they contract, where those parties operate in a commercial, as opposed to a domestic, context. This intention reflects an appreciation on the part of the legislature that an assured cash flow is essential to the commercial survival of builders, and that if a payment the subject of an adjudication is withheld pending the final resolution of the builder’s entitlement to the payment, the builder may be ruined.

The BCIP Act proceeds on the assumption that the interruption of a builder’s cash flow may cause the financial failure of the builder before the rights and wrongs of claim and counterclaim between builder and owner can be finally determined by the courts. On that assumption, the BCIP Act seeks to preserve the cash flow to a builder notwithstanding the risk that the builder might ultimately be required to refund the cash in circumstances where the builder’s financial failure, and inability to repay, could be expected to eventuate. Accordingly, the risk that a builder might not be able to refund moneys ultimately found to be due to a non-residential owner after a successful action by the owner must, I think, be regarded as a risk which, as a matter of policy in the commercial context in which the BCIP Act applies, the legislature has, prima facie at least, assigned to the owner.

The applicant’s submission was that recourse to the Bank Guarantees would not preserve the cash flow to the builder contrary to the intention of the Act as it is described by Keane JA.

33    In Gambaro Pty Ltd v Rohrig (Qld) Pty Ltd [2015] QSC 170, Gambaro Pty Ltd made a payment to the other party to a construction contract pursuant to the decision of an adjudicator under the Act and then sought a declaration that it was not liable for the amount of the payment and an order for the restitution of the said amount. Atkinson J considered the provisions of the Act and noted that Gambaro Pty Ltd had made the payment pursuant to a decision of an adjudicator. Her Honour considered the purpose of Part 3 and then said that there was nothing in Part 3 to indicate that the party’s right to litigate in a court to determine their rights inter se were excluded. Her Honour said (at 32):

There is no reason why a purposive rather than a literal reading of s 100 would lead to any different result. The purpose of Part 3 is to provide a quick method for the amount of disputed payment claim being determined and then paid. This ensures cash-flow to the builder. However, it is not intended to exclude the parties’ rights to litigate in a Court to determine their rights inter se, so long as amounts paid under Part 3 are taken into account. Nothing in s 100 or in the objects of BCIPA mandates that this may only happen on completion of the construction contract. The defendant’s argument as to striking out the whole of the plaintiff’s Claim and Statement of Claim must fail.

34    As I have said, the applicant does not dispute that the respondent can pursue the claims through the process of the court or in an arbitration. However, it contended that that is a very different thing from making a claim on a bank guarantee almost immediately after payment had been made pursuant to an adjudicator’s decision.

35    In Patterson Building Group Pty Ltd v Holroyd City Council [2013] NSWSC 1484 (“Patterson Building Group”), White J considered an application for an injunction to restrain a defendant from calling on or drawing down on two guarantees issued by St George Bank in relation to a construction contract. There had been an adjudication under the Building and Construction Industry Security of Payment Act 1999 (NSW). White J found that the relevant clause of the contract as to recourse on the security did not merely provide security to the defendant for amounts that might be found to be due to it. His Honour said that the clause was a risk allocation device that addressed the issue of who was to be out of pocket while the dispute under the contract was determined. One of the submissions made to his Honour was that the defendant in that case could not have recourse to the security to enforce a claim to be entitled to repayment of monies it had paid pursuant to an adjudicator’s determination, or to be paid amounts that had already been the subject of a decision by the adjudicator on which the defendant failed. As it happened, it was not strictly necessary for his Honour to consider that issue. However, he did so. His Honour referred to the decision in John Holland Pty Ltd v Roads and Traffic Authority of New South Wales [2007] NSWCA 140 which had considered s 34 of the New South Wales Act (similar but not identical to s 99 in the Act). I think his Honour found that recourse to the security would not be contrary to s 34. His Honour said (at 73 and 75):

The position can also be tested by considering what the position would have been if, for example, the defendant had recourse to the security to meet its claim to be owed money on account of liquidated damages before there was a reference to adjudication. There would be nothing I think in the Act that could preclude the defendant from having recourse to the security in those circumstances and it does not appear to me that the plaintiff could undo the effect of the defendant’s having recourse to the security by recourse to the procedures in the Act.

…

Whilst the significant difference between the circumstances of the present case and those which obtained in John Holland Pty Ltd v Roads and Traffic Authority of NSW must be acknowledged, nonetheless, I think the reasoning in that case applies also to the present. I think it would be straining the operation of s 34 to find it rendered void or required the reading down of clause 5.2.

Clause 5.2 was the clause in the conditions of contract which permitted the Principal to have recourse to the security.

36    Finally, I refer to the decision of the Court of Appeal of the Supreme Court of Victoria in Sugar Australia where the Court of Appeal addressed an appeal against a decision to grant an interlocutory injunction restraining recourse to two bank guarantees provided by way of performance bonds by a builder to an owner under a building contract. The judge from whom the appeal was brought had concluded that the proper construction of the contract was best left to the trial of the proceeding for a final determination. The Court of Appeal overturned the judge’s decision and Osborn and Ferguson JJA said (at [68]):

The parties made a commercial agreement as to when and how the performance bonds might be called upon. In doing so, they effectively determined which of them would bear the financial risk (up to approximately $4.2 million) without the need for the appellant to prove an entitlement to be paid. The safeguard negotiated and agreed by the parties was that the appellant must act reasonably when claiming an entitlement to payment and calling on the bonds. One important commercial effect of this was that the appellant did not have to wait until trial for payment of some amount by the respondent. This evident commercial purpose of GC 5.2, when viewed in the context of the accepted principles governing the grant of interlocutory injunctions and the ordinary practice adopted in performance bond cases, required the primary judge to resolve the construction issues raised in order to properly determine whether an injunction should be granted. If this were not done, in effect, the parties would be deprived of the commercial bargain that they made.

37    Clause 6.2 of the Subcontract Agreement does not purport to “annul, exclude, modify, restrict or otherwise change the effect of a provision of [the] Act” so that the question is whether it would otherwise have the effect of doing one of these things.

38    The applicant submits with some force that it was not contemplated by the Act that the effect of an adjudicator’s decision in terms of payment could be reversed shortly after the payment is made by the payer having recourse to bank guarantees. The difficulty for the applicant is to extract from the Act an “effect” which prevents enforcement of the Bank Guarantees. The applicant does not argue that the respondent cannot pursue its claims by way of proceedings in court or by way of arbitration and presumably, could not have recourse to the Bank Guarantees if it is successful. For what period then is the applicant to be precluded from enforcing the guarantees? On what basis is one to infer that the applicant is to enjoy the fruits of the adjudicator’s decision until a court or arbitrator decides to the contrary? The fact that the Act provides no answer to these questions means, I think, that recourse to the Bank Guarantees does not have the effect of excluding, modifying, restricting or otherwise changing the effect of a provision of the Act. Once the payment pursuant to the adjudicator’s decision is made, the Act ceases to have any effect on events thereafter and the respondent’s rights under the Subcontract Agreement are expressly preserved by s 100(1) of the Act.

3.    Are the circumstances such that the respondent would be acting unconscionably in having recourse to the Bank Guarantees?

39    This is a well-recognised basis upon which an interlocutory injunction may be granted (Clough Engineering at [77]).

40    The applicant submits that it would be clearly unfair and unreasonable and, therefore, unconscionable for the respondent to call on the Bank Guarantees on the basis of either a claim for liquidated damages or for restitution of the amount paid under the adjudication having regard to five matters. First, the applicant submits that the purpose of the Bank Guarantees was to ensure performance of the applicant’s works and not to allocate risk pending resolution of a dispute. For the reasons I have given, I reject this submission. Secondly, the applicant submits that the respondent certified over a year ago that it was satisfied that the applicant’s works were complete and that the applicant had complied with its obligations under the Subcontract Agreement. Thirdly, the applicant submits that the respondent did not raise any claim for liquidated damages at that time or in the subsequent adjudication of the applicant’s claims under the Act, nor in the proceedings for judicial review of that adjudication. Fourthly, the applicant submits that the respondent abandoned its pursuit of judicial review proceedings. Fifthly, the applicant submits that the respondent only raised a claim for liquidated damages after it was required to pay to the applicant the amount adjudicated under the Act and after the applicant became precluded from disputing the claim under the contract, or from claiming any further extensions of time. Finally, the applicant submits that the adjudicator in the adjudication relying on the respondent’s own expert found that the applicant was entitled to almost three months of delay and stand-down costs. There is a dispute between the parties as to the adjudicator’s findings with respect to delay.

41    The applicant submits that, in those circumstances, it has a prima facie case that recourse to the Bank Guarantees would constitute unconscionable conduct. It relies on s 20 of the Australian Consumer Law which prohibits conduct that is unconscionable within the meaning of the unwritten law from time to time.

42    Clough Engineering indicates the difficulties of an unconscionability argument in the case of a performance guarantee designed to operate as a risk allocation device. The unconscionable conduct would need to be extreme and almost merge into bad faith exercises of the power (Clough Engineering at 494 [38]).

43    The difficulty I have with this submission is that the applicant seems to be saying that the respondent should have raised its liquidated damages claim earlier, but does not allege that it cannot bring such a claim now in court or arbitration proceedings. In those circumstances, I cannot see how it would be unconscionable for the respondent to assert its legal rights under the Subcontract Agreement at this point.

4.    Would recourse to the Bank Guarantees be a breach of the respondent’s implied obligation to act in good faith?

44    The applicant submits that the respondent was under an obligation to act in good faith (Alstom Ltd v Yokogawa Australia Pty Ltd (No 7) [2012] SASC 49 [581]-[598]). I need not address whether that is so and, even if it is, whether it is a ground for granting an interlocutory injunction in the circumstances of this case. To establish a breach, the applicant relies on the same circumstances as it does in relation to the allegation of unconscionable conduct. The answer is the same.

The balance of convenience

45    Mr Stephen Young is the executive chairman of the applicant. The applicant’s parent company is Equity & Advisory Ltd (“E & A”). Mr Young is the managing director of E &A.

46    E & A is a public company listed on the Australian Stock Exchange with continuous disclosure obligations under the Corporations Act 2001 (Cth). If the respondent calls on the Bank Guarantees, E & A will be required to disclose that fact to its shareholders and the market. Mr Young believes that that will have a negative impact on E & A’s share price and he believes if the respondent calls on the Bank Guarantees this will have a negative impact on E & A’s relationship with the National Bank, and cause the Bank to re-evaluate the terms of its facilities with E & A. In his second affidavit, Mr Young gives further details of the potential impact of a call on the Bank Guarantees on E & A’s share price and the market capitalisation of the company.

47    In terms of the effect of a fall in share prices, the direct impact would be on the shareholders of E & A. I am prepared to accept that a fall in share prices may have adverse consequences for E & A and I think that I can take that into account on the balance of convenience even though the respondent and E & A are separate legal entities (Patrick Stevedores Operations No 2 Proprietary Limited and Others v Maritime Union of Australia (No 3) and Others (1998) 195 CLR 1 at 41).

48    However, there are powerful considerations on the other side. As I have said, the Bank Guarantees are not merely security for the respondent, but operate to allocate risk between the call on the Bank Guarantees and the judgment of a court or appropriate tribunal. They are designed to provide that the respondent have the benefit of the Bank Guarantees (i.e., the monies) even if in subsequent proceedings a court or appropriate tribunal decided that the respondent is not entitled to the monies and that they must be repaid. To award an interlocutory injunction restraining recourse to the Bank Guarantees would defeat an important purpose, if not the most important purpose, of the Bank Guarantees (Patterson Building Group at [78]-[79] per White J).

49    As I have said, I do not think that the applicant has established a prima facie case in the relevant sense and, in those circumstances, it is not strictly necessary for me to consider the balance of convenience. However, I will say that having regard to the matters I have identified, a reasonably strong prima facie case would need to have been established before an interlocutory injunction would be granted. The relationship between the requirement of a prima facie case and the balance of convenience was recently considered by the Full Court of this Court in Samsung Electronics Company Ltd v Apple Inc and Another [2011] FCAFC 156; (2011) 217 FCR 238.

Conclusion

50    The applicant’s application for an interlocutory injunction is refused.

Associate:    

Dated:    4 December 2015