FEDERAL COURT OF AUSTRALIA

Clough v Oil & Natural Gas Corporation Ltd [No 3] [2007] FCA 2082

INJUNCTION – application by first respondent to set aside application and service ex juris of the application – application by first respondent to discharge ex parte injunction as well as to discharge inter partes injunctions against respondent Banks – injunctions to restrain calling upon and payment under performance guarantees – whether prima facie case to maintain service ex juris – whether serious issues to be tried to maintain injunction against first respondent – no prima facie case and no serious issues to be tried – primary orders as sought in the motion – no serious issue as to accessorial liability of Banks – injunctions against Banks discharged.

Trade Practices Act 1974 (Cth) ss 80, 87(1A), 51AA

Federal Court Rules O 8 r 3(2)(c), O 9 r 7

Australian Competition and Consumer Commission v Albert (2005) 223 ALR 467 cited

Australian Competition and Consumer Commission v Samton Holdings Pty Ltd (2002) 117 FCR 301 cited

Bachmann Pty Ltd v B.H.P Power New Zealand Ltd [1999] 1 VR 420 discussed

Bray v F Hoffman-La Roche Ltd (2003) 130 FCR 317 cited

Cargill International SA Antigua Geneva Branch v Bangladesh Sugar & Food Industries Corporation [1996] 4 All ER 563 cited

Clough Engineering Ltd v Oil & Natural Gas Corporation Ltd (No. 2)[2007] FCA 927 referred to

Clough Engineering Ltd v Oil & Natural Gas Corporation Ltd [2007] FCA 881 referred to

Costa Vraca Pty Ltd v Bell Regal Pty Ltd [2003] FCAFC 305 cited

Edge, in the matter of Eco Panels Australasia Pty Ltd (in liq) [2007] FCA 30

Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd (1998) 3 VR 812 discussed

Hitchcock v TCN Channel Nine Pty Ltd [2000] Aust Torts Reports ¶81-550 applied

Ho v Akai Pty Limited (in liquidation) [2006] FCAFC 159 cited

Hughes Bros Pty Ltd v Telede Pty Ltd (1989) 7 BCL 210 cited

Ideas Plus Investments Ltd v National Australia Bank Ltd (2006) 32 WAR 467 discussed

Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533 applied

Matheson Engineers Pty Limited v El Raghy (1992) 37 FCR 6 cited

McCann v Switzerland Insurance Australia Limited (2000) 203 CLR 579 cited

Mitsui Kensetsu Corporation Australia Pty Ltd v State of South Australia (unreported Qld Supreme Court, 9 August 1990 per Byrne J) cited

Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 cited

Pierce Bell Sales Pty Ltd v Frazer (1973) 130 CLR 575 cited

Puccini Festival Australia Pty Ltd v Nippon Express (Australia) Pty Ltd [2007] VSC 288 cited

Quinlan v Safe International Forsakrings AB [2005] FCA 1362 cited

Reed Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd (1999) 15 BCL 158 cited

Re Media, Entertainment and Arts Alliance, Ex parte the Hoyts Corporation Pty Limited (1993) 178 CLR 379 cited

Resort Hotels Management Pty Ltd v Resort Hotels of Australia Pty Ltd (1991) 22 NSWLR 730 cited

Tycoon Holdings Limited v Trencor Jetco Inc (1992) 34 FCR 31 cited

Voth v Manildra Flour Mills Proprietary Limited (1990) 171 CLR 538 cited

Walker v ANZ Banking Group Ltd (No 2) (2001) 39 ACSR 557 cited

Western Australian v Vetter Tritter (1991) 30 FCR 102 cited

NC Seddon & MP Ellinghaus, Cheshire & Fifoot’s Law of Contract (8^th Aust ed) (2002)

Hudson on Building and Engineering Contracts

CLOUGH ENGINEERING LIMITED v OIL AND NATURAL GAS CORPORATION LIMITED, COMMONWEALTH BANK OF AUSTRALIA, HSBC BANK AUSTRALIA LIMITED AND BNP PARIBAS

WAD117 OF 2007

GILMOUR J

21 DECEMBER 2007

PERTH

THE COURT ORDERS THAT:

1.                  The Amended Application be set aside.

2.                  The service of the Amended Application on the First Respondent be set aside.

3.                  Order 2 made by the Court on 7 June 2007 be discharged.

4.                  The injunction granted against the First Respondent on 7 June 2007, as extended on 12 and 19 June 2007, be discharged.

5.                  The injunctions granted against each of the Second, Third and Fourth Respondents, on 5 June 2007, as extended on 12 and 19 June 2007 be discharged.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

INTRODUCTION

Parties

1                     The applicant, Clough Engineering Limited (“Clough”) and the first respondent, Oil and Natural Gas Corporation Limited (“ONGC”) are parties to a construction contract (“Construction Contract”).  The formal contract was made in January 2005.  It is a lump sum contract in excess of US$215 million and is for the development of certain oil and gas fields in the Krishna Godavari basin off the coast of the State of Andhra Pradesh in India.  Additionally, onshore facilities were to be constructed at Odalarevu, Near Amlapuram also in Andhra Pradesh.  Clough is an Australian company.  ONGC is an Indian company.  

2                     By instruments dated January 2005 (“performance guarantees”), each of the second to fourth Respondents (“Banks”) equally between them guaranteed the payment of 10% of the contract price to ONGC.  This equated to a little more than US$21.5 million.  The Banks are Australian companies, and the guarantees were entered into in Australia, and any demands thereunder are to be received in, and acted upon, in Australia.  The Construction Contract and guarantees contain Indian choice of law and forum clauses. 

3                     ONGC made demands upon the Banks, HSBC Bank Australia Limited (HSBC) in Perth and upon the Commonwealth Bank of Australia (CBA) and BNP Paribas in Sydney under the performance guarantees, on 4 June 2007, which was a Perth public holiday.  These proceedings were commenced the following day.  The Construction Contract was terminated by ONGC by a facsimile letter to Clough of 4 June 2007.

PREVIOUS ORDERS MADE BY THE COURT

(a)        On 5 June 2007 an ex parte interlocutory injunction was granted against the Banks restraining each of them from making payment to ONGC under the performance guarantees.  This injunction was extended on 12 June 2007 and on 19 June 2007, following an inter parties hearing, when an application by the Banks to discharge the injunction was dismissed.  

(b)        On 7 June 2007 an ex parte interim injunction was granted against ONGC restraining it from taking further steps to demand or obtain payment, or renewing such claims or demands, from the Banks under the performance guarantees.  The injunction was extended on 12 and 19 June 2007.   

(c)        On 7 June 2007 ex parte orders for leave to serve ONGC ex juris were made.

THE BASIS OF CLOUGH’S CLAIMS FOR RELIEF

4                     Clough has sought to restrain the calling on, or payment under, the performance guarantees for a number of reasons.  The first, it submits, is that the Construction Contact, properly construed, prohibits a demand being made in the prevailing circumstances.  The second, alternative, basis is that even if the Construction Contract, by its terms, does not preclude making a demand under the guarantees, nevertheless ONGC has caused or contributed to the circumstances leading to the asserted breach of the Construction Contract by Clough, upon which ONGC relies to make a demand.  The third is that alternatively, ONGC’s demand constituted unconscionable conduct within the meaning of the unwritten laws of Australia, in contravention of s 51AA of the Trade Practices Act 1974 (Cth) (“TPA”).  Finally, it is said, that the demand served by ONGC does not conform with the criteria required of a valid demand on the proper construction of the guarantees. 

5                     Clough’s claims against the Banks concern their intention to pay under the performance guarantees where such payment would constitute the Bank’s being, directly or indirectly, knowingly concerned in ONGC’s contraventions of the TPA.  Injunctive relief is available against the Banks under s 80 of the TPA: Clough Engineering Ltd v Oil & Natural Gas Corporation Ltd (No. 2)[2007] FCA 927 at [11]-[14].  Injunctive and other relief would also be available under s 87(1A) of the TPA. 

6                     The Banks are respondents and potentially liable in their own right.  ONGC is not a necessary party to the claim against them.  It is not necessary for Clough to join ONGC in order to establish its claims against the Banks: Matheson Engineers Pty Limited v El Raghy (1992) 37 FCR 6 at 9; Australian Competition and Consumer Commission v Albert (2005) 223 ALR 467 at [34].  Of course ONGC, whilst not a necessary party, is amenable as a “proper” party to be joined if in the jurisdiction.  A “proper”, as distinct from a “necessary” party, is a person who has sufficient connexion to the controversy that he or she might be joined, “but whose absence will not affect the constitution of the action”: Edge, in the matter of Eco Panels Australasia Pty Ltd (in liq) [2007] FCA 30 at [12].  As a person who would be a proper party if it were in the jurisdiction, ONGC would be thus amenable to the courts jurisdiction under FCR O 8 r 2, Item 18 (like the former FCR O 8 r 1(g)): Quinlan v Safe International Försäkrings AB [2005] FCA 1362 at [24], applying Costa Vraca Pty Ltd v Bell Regal Pty Ltd [2003] FCAFC 305. 

THE MOTION

7                     Since 19 June 2007 ONGC has entered a conditional appearance and by Notice of Motion filed on 20 July 2007 seeks orders relevantly:

             (1)       that, pursuant to Order 9 Rules 7(1)(a), (b) and (d) of the Federal Court Rules:

                         (a)       the Amended Application be set aside;

                         (b)       the service of the Amended Application on the First Respondent be set aside;

                         (c)       Order 2 made by the Court on 7 June 2007 be discharged; and

                         (d)       the injunction granted against the First Respondent on 7 June 2007, as extended on 12 and 19 June 2007, be discharged.

             (2)       In the alternative:

                         (a)       pursuant to Article 8(1) of Schedule 2 (the Model Law) to, and/or section 7(2) of the International Arbitration Act 1974 (Cth), referring the dispute between the Applicant and the First Respondent the subject of these proceedings to arbitration in accordance with clause 1.3.2 of the General Conditions of the written contract between the Applicant and the First Respondent dated 6 January 2005 (the Contract) before the Arbitral Tribunal, being the Honourable Mr Justice B N Srikrishna (retired), the Honourable Mr Justice V N Khare (retired) and the Presiding Arbitrator to be appointed jointly by the Honourable Justices Srikrishna and Khare (the Arbitral Tribunal);

                         (b)       discharging the injunctions granted on 5 and 7 June 2007, as extended on 12 and 19 June 2007; and

                         (c)       otherwise dismissing or staying the whole proceedings.

8                     ONGC seeks, by its motion not only to have the injunction granted against it discharged, whether by reason of the fact that service is set aside with consequential discharge or by reason of the fact that the proceedings against it are bound to be referred to arbitration, but also seeks to have the injunctions granted against the Banks discharged.  Clough concedes that ONGC, as a third party affected by these orders, is entitled to seek this relief. 

9                     The application is supported by the affidavits of Simon Lee sworn 20 July 2007, Yelluru Jayarama sworn 21 August 2007 and Dean Grondal sworn 22 August 2007. 

10                  The orders, including injunctive orders, previously obtained by Clough against ONGC were obtained on an ex parte basis, and supported by affidavit material which was uncontested.  ONGC had not entered an appearance at that time.  Only ONGC could contradict Clough’s case that Clough was not in breach of the Construction Contract, or where it was in breach, that this was occasioned by ONGC’s breach.  Accordingly, the claim by Clough, that ONGC was in contravention of s 51AA of the TPA, proceeded on the basis of unchallenged fact, namely, that ONGC had called for payment under the performance guarantees when there was no proper foundation for doing so, because Clough was not in breach of the Construction Contract or if it was, then this was as a direct consequence of breaches by ONGC: Clough Engineering Ltd v Oil & Natural Gas Corporation Ltd (No. 2) at [7] and [39].

11                  It was not necessary, then, to consider the question of whether a call by ONGC under the performance guarantees could be made merely upon the basis of a bona fide claim of breach or whether it required, by admission or by curial or arbitral determination, a demonstrated actual breach.  This was because, whatever the proper construction of cl 3.3.3, on the uncontroverted facts, a prima facie case, or serious issue that s 51AA had been contravened was made out.  Accordingly, I expressly left that question open: Clough Engineering Ltd v Oil & Natural Gas Corporation Ltd (No. 2) at [45].  For the first time in these proceedings, the question of construction requires to be considered.  It is fundamental to the disposition of the Motion.

REHEARING

12                  In relation to the application to set aside service of the Amended Application on ONGC, an application under O 9 r 7 of the Federal Court Rules (FCR) results in a review of the original decision to grant leave to serve ex juris and is a rehearing conducted on the basis of additional materials, recognising that a respondent should have “the opportunity to put before the Court any additional facts or arguments which might suggest that leave ought not to have been granted”: Tycoon Holdings Limited v Trencor Jetco Inc (1992) 34 FCR 31 at 33; Bray v F Hoffmann-La Roche Limited (2003) 130 FCR 317 at [53] per Carr J.  The onus remains on the applicant to satisfy the Court, in light of those additional materials and facts and arguments, that leave should have been granted: Voth v Manildra Flour Mills Proprietary Limited (1990) 171 CLR 538 at 564. 

13                  To maintain service ex juris, Clough needs to demonstrate a prima facie case for the relief claimed: FCR O 8, r 3(2)(c).  The threshold for demonstrating a prima facie case is not high.  It is whether on the material before the Court, inferences are open which, if translated into findings of fact, would support the relief claimed: Clough Engineering Ltd v Oil & Natural Gas Corporation Ltd [2007] FCA 881 at [36]; Western Australian v Vetter Tritter (1991) 30 FCR 102 at 110; Puccini Festival Australia Pty Ltd v Nippon Express (Australia) Pty Ltd [2007] VSC 288.  It requires the demonstration of an “arguable case”, bearing in mind that this requirement is to be met at the outset of the action, “without the advantage of discovery and other procedural aids to the making out of a case”: Ho v Akai Pty Limited (in liquidation) [2006] FCAFC 159 at [10], [12], [37], [43]. 

14                  The task of the Court, at this early stage of the proceedings, does not require evidence to justify a “finding” of the alleged TPA contravention: Bray v F Hoffman-La Roche Ltd at [96].

15                  It is also for Clough to establish a case for the continuation of the injunction.  No onus lies on ONGC to discharge the injunctions: Resort Hotels Management Pty Ltd v Resort Hotels of Australia Pty Ltd (1991) 22 NSWLR 730 at 731.  Accordingly, Clough requires to establish that there is a serious issue(s) to be tried.

16                  I will firstly deal with the orders sought under paragraph 1 of the Notice of Motion.  This involves a consideration of whether Clough has established anew that it has a prima facie case to maintain the grant of service ex juris on ONGC and whether there are any serious issues to be tried to sustain injunctive relief, either pending a trial of issues in this Court, or were the matter to be referred to the Arbitrators in India, by way of a protective interim measure in aid of the arbitration. 

17                  This, in particular, requires a detailed consideration of the following:

18                  The Construction of Clause 3.3

            (a)        the proper construction of the performance guarantee provisions in the Construction Contract;

            TPA s 51AA

            (b)        was any breach of the Construction Contract, asserted or demonstrated, and relied upon by ONGC, arguably caused by breach(es) on the part of ONGC and if so was ONGC thereby in contravention of s 51AA of the TPA in making demands under the performance guarantees;  

            (c)        was any demonstrated breach of the Construction Contract, relied upon by ONGC, not caused or even arguably caused by breach(es) on the part of ONGC thereby entitling ONGC to make demands under the performance guarantees; 

            The validity of the demand

            (d)        were the demands made by ONGC under the performance guarantees, invalid, on their face.

I will deal with each of these in turn.

THE CONSTRUCTION OF THE PERFORMANCE GUARANTEE CLAUSE

19                  For the reasons that I have outlined, the construction of the performance guarantee clause (3.3) has not yet been considered by the Court.  ONGC, the appropriate contradictor, but not previously before the Court, now raises this as a fundamental issue. 

20                  It is appropriate, in my view, to seek to resolve the construction issue, despite the interlocutory nature of the motion.  The hearing engaged some three days.  Full argument was presented on the issue by both sides.  There was no suggestion that the evidence before me, bearing on the construction issue, was other than complete.  The area of contest is neither beset by difficulty or novelty: Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533 at 535; Hitchcock v TCN Channel Nine Pty Ltd [2000] Aust Torts Reports ¶81-550 at [22]-[26].

21                  Sub-clauses 3.3.1, 3.3.2 and 3.3.3 of the Construction Contract provide as follows:

3.3.1    The Contractor shall furnish to the Company within 2 weeks from the date of signing of this Contract an unconditional and irrevocable Performance Bank Guarantee for due performance of the Contract, as per proforma given at Appendix –II of the Annexure-A of Agreement for a sum equivalent to 10% of the Contract price.  This irrevocable Performance Bank Guarantee shall be drawn in favour of the Company and shall be valid initially up to a period of Scheduled Completion Date for the Works of the Contract and warranty period plus sixty (60) days.

3.3.2    In the event completion of Works is delayed beyond the Scheduled Completion Date for any reasons whatsoever, the Contractor shall get the validity of the guarantee suitably extended so as to make it valid for 12 months plus 60 days from the actual date of completion of Works.  However if the delay is attributable to the Company, Company shall bear the cost of extension of such performance guarantee for such extended period at the normal bank rates as applicable to International Banking procedures.

3.3.3    The Company shall have the right under this guarantee to invoke the Banker’s guarantee and claim the amount there under in the event of the Contractor failing to honour any of the commitments entered into under this Contract.  In case Contractor fails to furnish the requisite Bank Guarantee as stipulated above, then the Company shall have the option to terminate the Contract and forfeit the Bid security amount and no compensation for the Works performed shall be payable upon such termination.  Upon completion of Works the above said guarantee shall be considered to constitute the Contractor’s warranty for the Work done by him or for the Works supplied and their performance as per the specifications and any other conditions against this Contract.  The warranty shall be in force for 12 months, from the completion date as provided in Clause 5.10.2 and 5.10.3.  (Emphasis added)

22                  The entitlement under cl 3.3.3 to invoke the performance guarantees is expressed to be conditional upon “the Contractor failing to honour any of the commitments entered into under this Contract”.  

23                  The principal issue is whether the words “failing to honour” mean that it is established as a fact that Clough has failed in some respect(s) to honour its contractual commitments or whether they bear a wider meaning which gives ONGC an entitlement to call upon the performance guarantees where it has simply asserted or claimed that Clough has so failed. 

24                  The construction spectrum at one end posits that the words “failing to honour” are incapable of accommodating any meaning involving an assertion or claimed breach, and that they must, inflexibly, apply to established breaches, and at the other end, that “failing to honour” must always and invariably mean an “asserted or claimed failure to honour”. 

Clough’s Submissions

25                  Clough does not contend for the first approach although it submits that it is commended by the ordinary meaning of the words used in cl 3.3.3.  It points to a number of factors in its written submissions as informing the construction process.   I set these out below. 

26                  First, ONGC may withhold approval of progress payments, providing that it states the reasons for withholding payment.  Subject to stating reasons for withholding approval of progress payments, if Clough is to recover the disputed money, it must go to arbitration unless ONGC chooses to remove its objection.  See cll 3.2.3-3.2.5 and 8.3.5.  If, at the end of the arbitration, Clough proves an entitlement to the money, it may recover it, but without interest: cl 1.3.2.  These provisions tend against the idea that the performance guarantee is required to protect ONGC in respect of any and all asserted or claimed breaches of contract.  

27                  Secondly, one consideration that might be brought to bear in deciding whether a claimed or asserted entitlement to payment is intended to be sufficient, is where the claimed or asserted entitlement is made in the context of an independent party having first certified that a certain state of affairs exists.  Where the parties have entrusted, by agreement, an independent person with the task of being satisfied and certifying that a certain state of affairs exists, and the contract then provides for the payment of money if that state of affairs exists, a claimed entitlement to payment may be inferred to be sufficient: Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd (1998) 3 VR 812 at 822.  It would be unusual, it was said, for an entitlement, particularly for A$25 million, to arise on mere assertion of breach, unconnected with some specific independent certification process, subject to one matter, discussed below.  

28                  Thirdly, another consideration is that if the contract provides, expressly, for a right to deduct certain moneys, i.e. a right of self-help, it may be inferred that those particular moneys may be payable on an asserted or claimed entitlement: Fletcher v Varnsdorf at 822.  There are, in this contract, specific provisions giving ONGC the right to deduct moneys in the period prior to practical completion.  They are found in cll 5.9.7.2 and 7.3.9.  Notwithstanding the absence of a certification provision, and the onerous terms of cl 5.9.7.2, it may be inferred that the parties intended Clough to pay those amounts on assertion of breach, and for the performance guarantees to be called for that purpose, leaving Clough out of pocket whilst it fought out any dispute about that in an arbitration.   

29                  Fourthly, in the period after practical completion, a specific provision, similar to cl 5.9.7.2, also requires Clough to pay moneys to ONGC irrespective, it seems, of any dispute as to the validity of ONGC’s claim.  This is cl 6.1.2.  Again, the provision is onerous in that it purports to require Clough to pay costs associated with reinstatement of the works simply upon a complaint of non-conformity by ONGC.  Again, that clause gives ONGC a right to deduct moneys, irrespective of the pendency of any unresolved dispute (by arbitration or otherwise), concerning ONGC’s claims that the works are non-conforming.  Again, the guarantees are likely to have been intended by the parties to operate on the strength of a claimed entitlement in this circumstance.  

30                  Fifthly, cl 6.3.2 is another provision which gives a right to deduct.  In the present circumstances, because there has been no agreed extended date for practical completion, it applies where there is an agreement or arbitral or other determination that ONGC has a right to recover liquidated damages. 

31                  Sixthly, the magnitude of the guarantees, totalling A$25 million, needs to be considered in the context of a construction which requires that any asserted breach, however trivial, or ephemeral, could see the contractor deprived of A$25 million working capital.  That, it is said, would be a peculiar result.   

32                  Seventhly, bearing in mind the above considerations, cl 3.3.3 operates to allocate risk to Clough in specified circumstances, and otherwise provides ONGC with substantial security by way of recourse to the Banks, in the event that Clough is slow to, or is unable or unwilling, to pay ONGC, where ONGC has established that Clough has failed to honour its commitments under the contract.   

33                  Clough further submits that to the extent that this is relevant this construction also produces a construction capable of harmonious application with Appendix III.  The pro-forma in Appendix III itself, again, conditions a call on “breach”, not “asserted or claimed breach”.  The words in Appendix III relating to payment “notwithstanding any dispute(s) pending before any… Arbitrator” and “without demur… and/or without reference to the Contractor” are intended to apply to the particular circumstances specified in the contract where the parties have required Clough to discharge an obligation, irrespective of any underlying dispute about it.  This, for example, would relate to the various contractual provisions involving a right to deduct monies by ONGC.   

34                  Accordingly, in summary, Clough submits that on a proper construction of the Construction Contract, the performance guarantees are capable of being called on in particular circumstances. They are where:

(a)                there is an acknowledgment or arbitral or other determination giving ONGC the right to obtain moneys during the performance of the contract between Clough and ONGC prior to practical completion (other than in relation to the matters covered by cll 5.9.7.2 and 7.3.9 of the contract);

(b)               Clough fails to pay an amount claimed by ONGC under cl 5.9.7.2 (for, effectively, the cost of the removal and substitution of suitable materials or the removal and rectification of any work) or fails to pay money claimed by ONGC under cl 7.3.9 (for, effectively, any premium paid for insurance by ONGC);

(c)                Clough fails to pay for the cost of remedial works within 30 days during the Guarantee/Warranty period as required under cl 6.1.2 of the contract; and

(d)               there is an acknowledgement or arbitral or other determination that ONGC has a right to recover liquidated damages under cl 6.3.2 of the contract. 

Reasoning

35                  The terms of the performance guarantees to be entered into under the Construction Contract are contained in Appendix III (not II) of Annexure A to the Contract.  Clause 3.3.3 requires to be construed in the context of the document as a whole.  This includes the context of Appendix III of Annexure A: see, for example, Re Media, Entertainment and Arts Alliance, Ex parte the Hoyts Corporation Pty Limited (1993) 178 CLR 379 at 386-387. 

36                  The performance guarantees prescribed by the Construction Contract accordingly promise payment even where disputes, which could include disputes as to whether or not Clough had failed to honour any of its commitments under the Construction Contract, are pending before a Court or arbitrator.  This, in my opinion, is a powerful indicator that a mere claimed breach of contract, which is not fraudulently asserted is sufficient to trigger entitlement to call on the performance guarantee.  Clough does not assert that ONGC has made a fraudulent claim.  This construction is reinforced by the fact that, under the prescribed terms of the guarantees, the Banks are required to pay “without any demur, reservation, contest or protest and/or without any reference to the Contractor”.   

37                  Under the terms of the performance guarantees, each of the Banks was entitled to treat the written demand by ONGC as conclusive and binding as to the amount due and payable, notwithstanding any dispute pending before any Court, Tribunal, Arbitrator or any other authority.  Liability under the performance guarantees was absolute and unequivocal. 

38                  Accordingly, the demands in this case are equivalent to the certificate provided by the National Australia Bank (NAB) to HSBC, certifying in effect that the conditions of the letter of credit had been met: Ideas Plus Investments Ltd v National Australia Bank Ltd (2006) 32 WAR 467 at [14].  The Western Australian Court of Appeal held that the certificate “amounted to no more than an implied representation that it had reasonable grounds for issuing the certificate” at [51].  The reasonable grounds were the bona fide belief by NAB that the conditions were satisfied at [55].  The written demands are also analogous to the requisite statutory declaration in Fletcher Construction v Varnsdorf at p 830 to the effect that the amount claimed represented an amount(s) remaining unpaid to the owner.  This was so even where the amount was disputed by the contractor.

39                  If it were the case that, on its proper construction, ONGC could not call on the guarantees until there was an admitted or established breach of contract, the time at which an arbitral tribunal or court might determine that matter could well be after the performance guarantees had expired: cf Ideas Plus Investments at [39] per Steytler P.  Such a construction does not, in my view, make commercial common sense: McCann v Switzerland Insurance Australia Limited (2000) 203 CLR 579 at [22] and [23] per Gleeson CJ.

40                  The performance guarantees secured the Contractor’s 12 month warranty under the Contract.  Assume a major defect was discovered by ONGC late in the Warranty period, say only one month prior to expiry of the performance guarantees, but was not acknowledged by Clough as resulting from any failure by it to honour its commitments under the Construction Contract.  On Clough’s construction, it would not be open to ONGC to call on the performance guarantees until a Court or Tribunal had found a breach of contract.  However, it is most unlikely that any such issue could be determined, especially in the context of a complex construction project, within a one month time frame.  By the time it had been determined, in ONGC’s favour, the guarantees would have expired, and the intended contractual security would be lost. 

41                  I consider that a commercial object of the requirement for performance guarantees under the Construction Contract is to allocate the risk of a party being out of pocket pending the resolution of any dispute and that ONGC was entitled to call upon the guarantees even where a genuine dispute existed, as to whether or not Clough was in breach and whether or not damages had been suffered: Fletcher Construction v Varsdorf at p 821 per Charles JA and at p 826 per Callaway JA.  That caseconcerned irrevocable standby letters of credit.  Nonetheless it is of assistance, in principle, in approaching the construction of the performance guarantees, which informs the construction of cl 3.3 as a whole and, for present purposes, cl 3.3.3 in particular.

42                  Clough was required by cl 3.3.1 to furnish to ONGC within two weeks of signing the Construction Contract an “unconditional and irrevocable” performance bank guarantee for the due performance of the contract in terms of a proforma guarantee set out in an appendix to the Construction Contract.  This lends force to ONGC’s construction: Fletcher Construction v Varsdorf at p 822 per Charles JA.  In that passage his Honour cited Hudson on Building and Engineering Contracts (para 17,075) which asserts that:

Insofar as a construction contract may make clear provision for the furnishing of an unconditional guarantee as security for due performance, the normal interpretation, … will be that, in response to the stipulated demand, an unqualified transfer of the sums in question is intended, provided only that there is a bona fide dispute or claim on the secured party’s part, and that any further investigation of its merits or extent is not usually intended by the contract.

43                  Bachmann Pty Ltd v B.H.P Power New Zealand Ltd [1999] 1 VR 420 involved consideration of a letter of credit.  The supplier in Bachmann did not seek to establish any case of fraud on the purchaser’s part but relied only on the contractual qualification upon the purchaser’s powers under the general conditions of the underlying contract to demand payment under the letter of credit.  It was conceded that the clause referred to constituted a contractual qualification on the purchaser’s powers in relation to the security.  This is to be contrasted with earlier Australian cases where the initial question was whether the underlying contract, on its proper construction, qualified the security holder’s powers to claim under the security.  The only point in the appeal as his Honour put it was as to the content of the qualification at [30].

44                  His Honour canvassed a number of cases in which the proper construction of the language contained in the standby letter of credit, “… until the party becomes entitled to exercise a right under the contract …” had been similarly discussed.  Those authorities range from requiring no more than a claimed entitlement which is not specious or fanciful: Hughes Bros Pty Ltd v Telede Pty Ltd (1989) 7 BCL 210 to requiring that the holder of the security establish, whether by litigation or arbitration, an actual entitlement to payment of the moneys: Mitsui Kensetsu Corporation Australia Pty Ltd v State of South Australia (unreported Qld Supreme Court, 9 August 1990 per Byrne J).

45                  Ultimately, as a matter of construction of the particular standby letter of credit, his Honour concluded that as between the purchaser and the supplier, the purchaser was entitled to have recourse to the security where according to a bona fide claim made by the purchaser monies were due to it from the supplier which exceeded any monies due from it to the supplier at [53].

46                  In Ideas Plus InvestmentsSteytler P, with whom McLure and Buss JJA agreed, concluded that the NAB was empowered to claim under a letter of credit granted by HSBC so long as it had a bona fide belief that the conditions were satisfied.  The certificate by the NAB issued to HSBC certifying in effect that the conditions of the letter of credit had been met was only a representation of such a bona fide belief and perhaps that there were reasonable grounds for such a belief. [55]-[57], [105]  See also Fletcher Construction v Varsdorf at p 830.  Steytler P with whom McLure JA agreed held that the basis for the payment made by HSBC pursuant to its independent obligation to NAB under the letter of credit was the provision by NAB of a certificate in the required terms.  It was, his Honour found, the presentation of that certificate, not the truth of the facts certified, which conditioned HSBC’s obligation to pay. 

47                  The provision of cll 3.2.3-3.2.5 and 8.3.5 do not, in my view, assist the construction contended for by Clough.  Those concern the contractual entitlement of ONGC to withhold approval and payment of progress claims.  That entitlement provides a form of security to ONGC where there is a dispute because, pending arbitration, it is not required to pay the disputed amounts to Clough.  It does not inform the question of the circumstances in which the performance guarantees may be called upon. 

48                  Nor do I consider that the absence of an independent certification as to the existence of a certain state of affairs to trigger the obligation to make payment advances Clough's argument on construction.  That is but one type of mechanism for payment in a contract.  Its absence does not assist the construction of this contract. 

49                  The fact relied upon by Clough that ONGC has the right variously to deduct monies (e.g. cll 5.9.7.2 and 7.3.9) or that Clough is required to pay certain monies, irrespective of the existence of a dispute (e.g. cl 6.1.2) actually serves, in my opinion, to reinforce the view that one of the purposes of the performance guarantees is to allocate the risk to which I have referred: Fletcher Construction v Varsdorf at p 829 per Callaway JA, Batt JA concurring. 

50                  The entitlement of ONGC, under cl 6.3.2, to payment of contractually ascertained and agreed liquidated damages equal to 3% of the total contract price for each month of delayed completion of the entire Works or a part of these, and to recover these by a call upon the performance guarantees, is also of no assistance to Clough’s contentions.  The clause is but an example of a particular circumstance when the performance guarantees may be called upon and puts that entitlement beyond doubt.  It does not, in my opinion, assist Clough’s construction of cl 3.3. 

51                  Clough submits that ONGC’s construction would permit a call on the full amount of the performance guarantees, approximately US$21.5 million even in the case of a trivial or ephemeral breach, and that this would be a peculiar result. 

52                  As to this, it should be recognised that equity will generally intervene to ameliorate the application of a legal right if it is employed capriciously or unreasonably or harshly, or oppressively such as to be unconscionable: Pierce Bell Sales Pty Ltd v Frazer (1973) 130 CLR 575 at 587-588 and 590-591; NC Seddon & MP Ellinghaus, Cheshire & Fifoot’s Law of Contract (8^th Aust. ed) (2002), [20.9].  This doctrine, although distinct from, is very similar to, the implied contractual duty of good faith: Walker v ANZ Banking Group Ltd (No 2) (2001) 39 ACSR 557, [93]-[96], esp. [96]; Australian Competition and Consumer Commission v Samton Holdings Pty Ltd (2002) 117 FCR 301.  Section 51AA of the TPA likewise may afford relevant protection.  This however does not mean that the entitlement at law to call on the whole amount under the performance guarantees should be read down from what is otherwise a construction which is in harmony with the contract as a whole and which in its context produces a commercially sensible meaning.  Furthermore, to the extent that the calling up of the performance guarantees resulted in an overpayment to ONGC then there would be an entitlement in Clough to an ‘accounting’ in due course from ONGC: Cargill International SA Antigua Geneva Branch v Bangladesh Sugar & Food Industries Corporation [1996] 4 All ER 563 at 571. 

53                  Accordingly, in my opinion, upon the proper construction of cl 3.3.3, ONGC was entitled to call on the performance guarantees where it had a bona fide belief in the genuineness of its claim that Clough had failed to honour commitments under the Construction Contract.  

54                  Of course, even on Clough’s case, ONGC was entitled to call on the performance guarantees in the case of demonstrated breach, not caused by ONGC’s breach.  I will consider that important question in the context of the following analysis of the claims by Clough that ONGC, in making demands, under the performance guarantees was acting in contravention of s 51AA of the TPA. 

55                  It follows that I do not consider there to be a prima facie case or a serious issue to be tried as to the construction contended for by Clough.

SECTION 51AA TPA

56                  I have found that, on the proper construction of the Construction Contract, the performance guarantees could be invoked upon the basis merely of an asserted failure on the part of Clough to honour its commitments under the Construction Contract.  However, there are examples of demonstrated breach as well as merely asserted breach.

57                  Clough accepts that it is in breach in a number of respects, for example:

(a)        Clough has not delivered three ‘Christmas Trees’.  These are vital components for well-completion.  Clough accepts that these have not been delivered although it has largely been paid for them.

(b)        Clough has failed to undertake certain shallow water works and onshore works separately from the off-shore works.

58                  However, it is said by Clough that these breaches of the Construction Contract were caused by ONGC itself being in breach and that it would be unconscionable within the meaning of s 51AA of the TPA in those circumstances, for ONGC to call upon the performance guarantees. 

59                  In particular, Clough contends that the delay in its providing the ‘Christmas Trees’ was caused by breach on the part of ONGC relating to the ‘DHPTT Cards’.  It also asserts that ONGC was in breach in other respects, such as failing to effect well-completion in relation to the deep water work and that ONGC lost the first ‘Christmas Tree’ and certain tools, all of which contributed to delays of the Project.  The failure to undertake shallow water works, likewise, Clough says, was occasioned by breaches on the part of ONGC.  It is not possible to resolve these factual questions and whether those asserted breaches were occasioned by ONGC’s own breaches.  This in turn gives rise to a prima facie case or a serious issue to be tried, whether based on those asserted breaches, ONGC acted unconscionably contrary to s 51AA of the TPA in calling up the performance guarantees: Reed Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd (1999) 15 BCL 158 at 164.  

60                  However, this does not determine the matter.  ONGC contends that Clough is indisputably in breach of its contractual obligations in two further important respects.  These concern Clough’s obligations to extend the validity of the performance guarantees and to provide documentary proof that relevant insurance cover is being maintained by Clough.  ONGC submits that these obligations exist, even assuming that the need for the extensions is the result of breach(es) on its part.  I now turn to consider each of these.

Breach of cl 3.3.2: The performance guarantees

61                  I have, again, set out cl 3.3.2 below, for ease of reference:

3.3.2    In the event completion of Works is delayed beyond the Scheduled Completion Date for any reasons whatsoever, the Contractor shall get the validity of the guarantee suitably extended so as to make it valid for 12 months plus 60 days from the actual date of completion of Works.  However if the delay is attributable to the Company, Company shall bear the cost of extension of such performance guarantee for such extended period at the normal bank rates as applicable to International Banking procedures.

62                  Clough contends that it is not in breach of an obligation under cl 3.3.2 because the Completion Date was not validly extended, leaving the Completion Date “at large” with the result that cl 3.3.2 could not be complied with, because the duration of any extension was uncertain.

63                  Performance guarantees play a critical part in international commerce and in international construction contracts, in particular.  So much has been recognised by the courts on many occasions: the authorities are collected by Steytler P in Ideas Plus Investments at [32]-[34].  They were, objectively viewed, of critical importance to ONGC under the Construction Contract.  This is manifest in two ways.  Under cl 3.2.1 of the Construction Contract, no payments become due and payable to Clough until Clough has furnished the necessary performance guarantees and the Certificate of Insurance to ONGC.  This would extend to performance guarantees whose validity was required to be extended under cl 3.3.2.  Furthermore, as its option, ONGC was entitled, under cl 3.3.3, where Clough failed to furnish the performance guarantee(s) to terminate the Construction Contract.  

64                  Completion Date of the Works under the Construction Contract was 15 April 2006 (cll 2.2.5 and 6.3.1).  The warranty period under the Construction Contract is 12 months from the date of issue of the Certificate of Completion and Acceptance (cl 6.1.1).   

65                  Any performance guarantee was to be initially valid up to 14 June 2007.  This was by virtue of the provisions of cl 3.3.1, which provide for the period of validity to extend from the Completion Date, plus the warranty period and a further 60 days.  Each performance guarantee is expressed to be valid until 14 June 2007.  In the event that completion is delayed beyond the Scheduled Completion Date, Clough was liable to extend the validity of the performance guarantees accordingly, so as to maintain the same period of validity beyond that date.  

66                  I will now examine the course of conduct between Clough and ONGC concerning the extension of the Completion Date and in turn the performance guarantees.

67                  By correspondence commencing on 20 March 2006, Clough requested from ONGC an extension of time for completion of the work “beyond January 1, 2007”.  There were further requests made by Clough in correspondence to this effect.  By letter from ONGC to Clough dated 15 April 2006, and in response to these requests, ONGC provisionally extended the time for completion of the works to 31 January 2007 without prejudice to its rights to recover liquidated damages, in accordance with the provisions of the Construction Contract.   

68                  By letter dated 3 June 2006, ONGC required Clough to extend the performance guarantees as required under the Construction Contract.  This demand was repeated by letter to Clough from ONGC dated 16 June 2006.  On that same date, Clough in a letter to ONGC indicated that overall Project commissioning could only be implemented by 11 April 2007 and that the new Schedule Completion Date should be 11 July 2007. 

69                  By a letter dated 13 July 2006, Clough referred to its ongoing request for a reasonable extension of time.    

70                  The minutes of a meeting convened at the request of Clough and held between it and ONGC on 21 July 2006 in New Delhi disclosed that Clough agreed to adopt a “proactive approach to complete the Project expeditiously within the time frame set out i.e. by the end of the working season 2007”, which it was common ground, was the end of April 2007.    

71                  By a letter dated 29 July 2006, ONGC again required Clough to extend the performance guarantees as required under the Construction Contract.  This request was repeated in correspondence from ONGC to Clough dated 12 August 2006.  In minutes of a meeting held between the parties dated 23 August 2006, it is noted that Clough was to review certain delivery dates critically and to seek ways to improve upon these such that the completion of the Project in April 2007 was not compromised.   

72                  By a letter from ONGC to Clough dated 4 September 2006, following meetings at a senior level between the two parties, ONGC advised Clough that the time for completion of the Project was extended to 13 April 2007.   

73                  By correspondence dated 7 October, 2 and 6 November 2006 and 29 March 2007, ONGC required Clough to extend the performance guarantees as required under the Construction Contract.   

74                  In a letter to ONGC dated 3 April 2007, Clough stated:

As ONGC is aware, the Performance Bank Guarantee(s) (PBG) is current to 14^th June 2007.  Contract clause 3.3.2 provides for the extension of the PBG “to make it valid for 12 months plus 60 days from the actual date of completion of Works”.  The date of actual completion of Works is not now known nor can it be known until after the Way Forward has been determined and agreed between the parties.  Rather than pre-empt the outcome of these deliberations by extending the validity of the PBG, CEL will wait until an agreement is reached concerning the Way Forward, and to then act accordingly.   

75                  By letter of 11 April 2007, ONGC again provisionally granted a further extension of time for completion of the works until 30 April 2008 and yet again required Clough to extend the performance guarantees as required under the Construction Contract.  This latter request was repeated in correspondence from ONGC to Clough dated 14 April 2007.    

76                  By letter dated 16 April 2007, Clough set out what it described as a ‘road map’ to meet certain objectives towards the completion of the Works.  As part of the proposal, Clough said that it would require the three performance guarantees held by ONGC to be returned but that, in recognition that work would still be required to complete the onshore plant, Clough was willing to provide a performance guarantee to the value of 10% of the remaining work, which was US$2.17 million.   

77                  By letter dated 1 June 2007, Clough’s chief executive wrote to ONGC.  He wrote in the following terms:

I understand that the bonds (referring to the performance guarantees) currently expire in June and appreciate that allowing the bonds to lapse may be contrary to that agreed between ourselves.  I am seeking agreement from my Board to extend the bonds to ensure we have sufficient time to conclude our negotiations.  This action is of course subject to your agreement to reach a negotiated exit solution as was the direction from Mr Bose at my last meeting.

78                  By letter of 4 June 2007, ONGC yet again called on Clough to extend the performance guarantees.  The performance guarantees were never extended beyond their original expiry date of 14 June 2007.   

79                  Clough contends that the extension of time for the scheduled completion date of the Works by ONGC to 13 April 2007 was unilateral and was not the subject of mutual agreement between the parties.  This is set out in its letter of 20 September 2006 to ONGC.  That letter concluded by stating that Clough was currently in the process of developing a revised Project Schedule in consultation with ONGC, and that Clough looked forward to working with ONGC in successfully completing the Project.   

80                  However, it was Clough who had earlier requested an extension of time by its letter dated 20 March 2006 for a completion of the work beyond 1 January 2007.  It was in response to this that ONGC made a provisional extension of time to 31 January 2007 which met Clough’s then request.  I do not consider that the reservation of rights by ONGC to recover liquidated damages, or its asserted failure to acknowledge its own breach, detracts from the agreement reached between the parties extending the date for Practical Completion of the Project.   

81                  Furthermore, whatever be the status of ONGC’s letter of 4 September 2006 on the question of the date for Practical Completion, at the meeting of 21 July 2006, in New Delhi, to which I have referred, Clough agreed to adopt a proactive approach to complete the Project by, in effect, the end of April 2007.  Even if that were read to mean not before the end of April 2007, nonetheless Clough was, in my opinion, obliged to extend the existing performance guarantees within a reasonable time from 21 July 2006, and which would be valid until the end of June 2008, being a period of one year plus 60 days from the end of April 2007.   

82                  Accordingly, in my opinion, Clough was obliged under cl 3.3.2 of the Construction Contract to extend the validity of the performance guarantees so that they would be valid for 12 months plus 60 days from the date of completion of Works as varied.  On the basis of the two variations to which I have referred, Clough, within a reasonable time of the date of each variation, was required to extend the performance guarantees to 31 March 2008 and June 30 2008 respectively.  What is a reasonable time is a question of fact.  It depends upon the circumstances and its limit is determined by what is fair to both parties: Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 at 567-568.

83                  I do not accept Clough’s submissions that the date for Practical Completion was at large and therefore that cl 3.3.2 could not be complied with because the duration of the extension was not clear.    

84                  Even if it were the case that cl 3.3.2 required Clough to extend the performance guarantees at any time prior to their lapsing, as Clough contends, it was clear as at:

            (a)        16 April 2007 that Clough was not then prepared to extend the performance guarantees.  In a letter to ONGC it advised ONGC that it required the three performance guarantees then held by ONGC to be returned and stated that it was willing to provide a performance bond to the value of 10% of the remaining work, in the amount of US$2.17 million; and   

            (b)        1 June 2007 that the CEO of Clough had no relevant authority from Clough’s Board to extend these and in any event such authorisation was, wrongly in my view, stated by him to be subject to ONGC agreeing to “reach a negotiated exit solution”.  The obligation under cl 3.3.2 is not so conditioned.  

85                  As a matter of fact, the performance guarantees were never extended prior to the termination of the Construction Contract.  Accordingly, whatever view is taken as to the obligation under cl 3.3.2 to extend the validity of the policies, Clough was in breach of this provision. 

Breach of cl 7.3.8: Insurance

86                  By cl 7.3.1 of the Construction Contract, Clough was required to take out certain insurance policies for the benefit of and in the joint names of itself and ONGC.  These were to maintain cover in certain respects from the commencement of the Works until the date of issue of the Certificate of Completion and Acceptance and in certain other respects during the guarantee period.  Insurance cover was required amongst other things, for ‘Cargo Trains’ and ‘Contractors All Risks’ as well as ‘Third Party’ (cl 7.3.6).   

87                  Clause 7.3.8, relevantly, provides as follows:

7.3.8    The contractor shall prior to commencing any relevant part of the Works deliver to the Company, copies of the Insurance Policies as evidence that the required policies are in full force and effect.

            It shall be the responsibility of the Contractor to pay the premium in time and to keep the policies of insurance, as required by the Contract, valid throughout the period of execution of Works.  The Contractor shall wherever required produce to the Company the policy(ies) of insurance. . . .

            The Contractor shall produce a certificate from insurance company to the effect that all premia under the policy have been paid and indicating validity of the policy. …

88                  In light of the extended time for completion of the Works, ONGC, in numerous correspondence addressed to Clough between 3 June 2006 and 14 April 2007, sought Clough’s compliance with cl 7.3.8 in ensuring that all relevant policies were maintained and required Clough to furnish details of the extended policies.  This was in effect a request for copies of the policies under cl 7.3.8.  ONGC also sought copies of relevant “Certificates of Currency” which, in effect, were the Certificates of Insurance referred to in cl 7.3.8. 

89                  However, Clough never provided copies of the requested policies of insurance valid for the extended dates for completion of the Works and in turn the extended warranty periods or relevant Certificates of Insurance.  It was entirely reasonable, at the time of the call on the performance guarantees, for ONGC to infer from the non-provision of these policies or the Certificate(s) of Insurance to it that Clough had failed to honour its obligation to secure their extension.  In any event, Clough was, in this important respect, in breach of its contractual obligations to provide those documents whatever the actual position was as to the currency of the relevant policies.  The documents were never produced by Clough. 

90                  The requirement to provide the certificate(s) of insurance was of considerable significance.  The policies were for the benefit not only of Clough but also ONGC.  As was the position with the performance guarantees, by cl 3.2.1, no payments became due and payable to Clough under the Construction Contract unless Clough furnished to ONGC the Certificate of Insurance as required by cl 7.3. 

No Prima Face Case or Serious Issues to be Tried

91                  I have concluded that, in any event, Clough was in actual breach of the Construction Contract in two important respects.  First, it failed to extend the performance guarantees as required under cl 3.3.2.  Secondly, it failed to deliver copies of relevant policies of insurance and the Certificate(s) of Insurance covering the extended Completion date(s) and Warranty Period(s). 

92                  Whatever may be the position in respect of other breaches, the actual breaches concerning the performance guarantees, the extended policies of insurance and the Certificate of Insurance are in a different category.  

93                  Clause 3.3.2 imposes an obligation upon Clough to extend the validity of the performance guarantees in the event completion of the Works is delayed beyond the Scheduled Completion Date “for any reasons whatsoever”.  The only concession, in that respect, to a situation where the delay was caused by ONGC is that it would have to bear the cost associated with obtaining such extension(s).  

94                  The obligation implicitly contemplates that the delay in completion may have arisen as a result of breach by ONGC.  Whatever other consequences might flow contractually or otherwise as a result, Clough remained obligated to extend the validity of the performance guarantees, and in turn to produce to Clough when asked, copies of the relevant policies and Certificate(s) of Insurance covering the extended completion date(s) and warranty period(s).

95                  It follows that, in calling up the performance guarantees in respect of those breaches, ONGC was acting according to a legal entitlement under cl 3.3.3 untainted by conduct which could even arguably be characterised as unconscionable in contravention of the TPA.  The position is the same in relation to the breach by Clough of cl 7.3.8 concerning the insurance documents. 

96                  Accordingly, I am not persuaded that there is any prima facie case or serious issues to be tried in respect to the alleged contraventions of s 51AA of the TPA in those respects.  This is sufficient to dispose of those questions.  It is of no consequence that a prima facie case and serious issues to be tried arose in other respects. 

THE VALIDITY OF THE DEMANDS

97                  Clough contends that the demands made by ONGC against the Banks were not valid, because each failed to contain a statement of an amount that is due and payable by Clough to ONGC.  The performance guarantees it submits, disclose that a demand for all or less than the full amount of the sums under them is contemplated in each case.  Taking the HSBC guarantee as illustrative, the words “any/all monies to the extent of US$7,178,371.86”, as well as “Any such demand … shall be conclusive and binding, without any proof, on the Bank as regard the amount due and payable …” were said to make good that proposition.   

98                  I accept that the performance guarantees each contemplate that less than the full amount guaranteed might be the subject of a demand.  However, each also contemplates a demand for the full amount.  A demand for the full amount was made in each case predicated on an unequivocal statement that Clough was in breach of the Construction Contract.  I do not consider there to be any serious issue or prima facie case as to the invalidity of the demands.   

99                  It is not necessary to consider the alternative orders sought by ONGC under para [2] of its motion because of the conclusion to which I have come in relation to paragraph [1] of the motion.

100               In those circumstances, there is no basis for the continuation of injunctive orders as against the Banks.  There cannot, given my conclusions in relation to ONGC, be any serious issue of statutory accessorial liability as against the Banks. 

BALANCE OF CONVENIENCE

101               I propose to make some findings in relation to the balance of convenience.  This obviously is not to inform my discretion as to whether to grant injunctive relief.  I have found that there is no serious issue to be tried and accordingly, the exercise of my discretion does not arise.

102               It may be, in due course, that the strength of Clough’s case will require to be considered in relation to the balance of convenience: Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148; Appleton Papers Inc v Tomasetti Paper Pty Ltd (1983) 50 ALR 428 per McLelland J; Ingersoll-Rand (Aust) Ltd v Industrial Rollformers Pty Ltd [2000] NSWSC 177.  This would be particularly so in this case, as the refusal of injunctive relief has the practical effect of a final determination of the issues: Kolback Securities Ltd; Cayne v Global Natural Resources plc [1984] 1 All ER 225.  For the present however, such a consideration is not necessary.  Should it become so, these findings would then arise for reconsideration.

103               In the reasons for judgment in Clough Engineering Limited v Oil and Natural Gas Corporation Ltd [No 2] [2007] FCA 927 at [46]-[66], I concluded that the balance of convenience strongly favoured the grant of injunctive relief.  As I have said, ONGC, although a party, had not then appeared.  This, importantly, meant that there was no party to contradict the existence of serious issues to be tried, as contended for by Clough.  I formed the view that to have discharged the injunctions could very well lead to irreparable harm to Clough, its shareholders, employees and third parties.  I concluded that damages would not be an adequate remedy. [66]

104               The position has now changed.  ONGC has appeared, put on evidence, cross-examined and advanced submissions through counsel.  Clough’s financial circumstances have also changed.

105               The changed position is disclosed by a further affidavit of Mr Simons sworn on 7 September 2007.  The expression “G1 contract” as used in this affidavit is a reference to the Construction Contract.  It is to the following effect:

(a)        Clough’s annual results for the financial year ended 30 June 2007 reported an audited loss of $105.3 million, which ‘loss directly resulted from provisions taken on the BassGas and G1 contracts’, such that Clough is materially in default of its secured debt facilities with the Banks [3]-[5];

(b)       each of the Banks want Clough to repay all secured debt facilities and because of Clough’s defaults and because of the legal action threatened by ONGC, the Banks will not allow the use of current facilities or extend any further facilities to Clough ‘until such time as the injunction and the related matters are dissolved or otherwise dispensed with’ [6], such that Clough will not have sufficient available debt facilities to fund the encashment of the performance guarantees [7];

(c)        the announced capital raising ‘will provide new liquidity to replace the cash that has been utilised in funding the costs on the G1 contract which have not been reimbursed or paid to Clough by ONGC’ [10];

(d)       Clough has paid creditors of US$167.4 million on the G1 contract, but has received payments from ONGC of only US$139.4 million, a cash short fall of US$28 million [11], and Clough still owed some A$52.4 million to creditors on the G1 contract [13];

(e)        between 1 July 2007 and 4 September 2007, Clough has paid G1 contract creditors about A$31.2 million, leaving a balance of A$21.2 million, which will need to be paid from cash flow [14];

(f)        the payments to G1 contract creditors is causing significant strain [15];

(g)        to replace Clough’s cash deposits that have been depleted by reason of the G1 contract, Clough proposes to recapitalise to enable it to make payments to the remaining G1 contract creditors and fund its capital expansion [16];

(h)        the recapitalisation is not directed to funding the encashment of the performance guarantees but is for paying the G1 creditors, funding capital expansion and repaying the Banks [17] and, importantly, if the performance guarantees were paid, Clough would be prevented from some or all of these objectives, with the consequences described in Mr Simons’ 28 May 2007 affidavit [18];

(i)         the proposed recapitalisation will not be completed until the end of December 2007 and is dependent upon shareholder approval [19]-[20].

CLOUGH’S submissions

106               Annexure RFS1 to Mr Simons’ affidavit is Clough’s release to the Australian Stock Exchange dated 28 August 2007 containing its preliminary final report for the year ended 30 June 2007.  Clough says that it is important to understand the true tenor of its financial position by reference to that report, as follows:

(a)        Provisions of $130.7 million had been taken, which offset a year of underlying profit growth and the “management of these provisions and funding to support the growth strategy will require a refinancing” which the board and the major shareholders have approved.

(b)        The proposed capital raising, which will be voted at the AGM in November 2007, will raise $5.6 million from Murray & Roberts through a share placement, $39.4 million through a renounceable rights issue to all shareholders, ie a total of $45 million.

(c)        The finance facilities which Clough has secured are:

(i)         a short term loan facility of $25 million from Murray & Roberts, which short term loan facility will be repayable on completion of the recapitalisation, such that Clough will have cash of only $20 million post the recapitalisation, against outstanding Construction Contract creditors of $21.2 million;

(ii)        a loan guarantee facility from Murray & Roberts of up to $160 million, that is to say, a facility under which Murray & Roberts has agreed to guarantee loans that might be able to be secured from third-parties (ie banks) (and only to fund Clough’s vessel investment programme), such that this facility does not give Clough cash, but an ability to raise cash supported by this guarantee – the evidence is that the Banks are unwilling to provide further facilities to Clough until the injunction issue and the related matters with respect to the Construction Contract are resolved.

(d)        It is a misnomer to suggest that Clough had $82.9 million of cash available to pay the performance guarantees in that, as at that point in time, Clough’s current assets were $351.1 million and its current liabilities were $354.9 million. Clough’s balance sheet position is far from healthy.

(e)        Although the recapitalisation will allow Clough to deal with cash flow issues flowing from the BassGas and Construction Contract disputes and provide the necessary support for capital expenditure, Clough has also announced its intention to dispose of non-core assets.  It can be readily inferred that this asset disposal is necessary to repay the Banks, as they have required repayment, as is made clear in [6] of Mr Simons’ affidavit of 7 September 2007. It also cannot be predicted, with confidence, that this asset disposal program will be successful.

107               Therefore, Clough submits that its financial position is far from secure.  It has a large number of creditors to pay, and a shortfall in payments from ONGC.  It has been required to repay the Banks and they are unwilling to provide further funding.  It is not disputed that Clough has performed around 82% of the work under the contract and has only received around 66% of the contract price.  Clough has had to raise short term debt from its shareholder, Murray & Roberts, and has sought to recapitalise.  The recapitalisation will be used as to $25 million to repay the short term debt facility.  Clough has, as required by the relevant accounting standards, provided for a payment under the performance guarantees but, regardless of that provision, Clough’s cash position and its financial position is far from healthy. Also, as to the $160 million loan guarantee facility, it is just that, and this has not given Clough an extra $160 million but rather an ability to raise $160 million on Murray & Robert’s guarantee specifically to support the facilities relating to Clough’s vessels. $160 million has not been raised and, in the circumstances, is difficult to raise.

108               Mr Simons’ evidence given during his cross-examination requires to be understood bearing the above in mind.  His evidence and the position, so Clough submits, are as follows:

(a)        Clough’s cash position of $82.9 million does not indicate the true position in two respects, first, some $35 million is not available to Clough and held by PT Petrosea and, second, as explained, cash is not actually available because of Clough’s existing current liabilities.

(b)        There is a difference between available debt facility limits and limits for other facilities (including for contingent instruments, foreign exchange facilities, hedging facilities).  No cash is available under these latter types of facilities.

(c)        The fact that Clough had excess capacity with respect to these other facilities (e.g. to secure other performance guarantees) does not mean, and says nothing about, Clough’s ability to pay the Banks on the encashment of the subject performance guarantees.

(d)        Under the relevant accounting standards, Clough was required to make provision for the anticipated loss on the G1 contract, including by reason of the fact that the G1 contract has been terminated and the performance guarantees have been called.  When provisioning, it can readily be inferred that an attempt has been made to provide for the potential loss (as required by the accounting standards) offset against potential gains (through mitigation by, for example, selling the equipment the subject of the G1 contract).  There are currently proceedings in India relating to equipment the subject of the G1 contract.  In those proceedings, ONGC seeks a delivery up of the equipment, and there is an issue about what ONGC is required to pay.  If the equipment is required to be delivered without payment or without sufficient payment then it can readily be inferred that Clough’s provisioning would not have fully accounted for its actual loss.

(e)        The loan guarantee facility of up to $160 million is not available to Clough in terms of cash.

(f)         The suggestion that the provisioning was to pigeonhole or isolate the economic impact of the G1 contract misstates the position by failing to recognise the fact that the accounting standards required such provisioning.

(g)        The suggestion that credit approval has not been withdrawn fails to have regard to the evidence that the Banks require repayment (see also: [6] of Mr Simons’ affidavit of 7 September 2007).

(h)        The suggestion that Clough had other performance guarantees or bond facilities fails to have regard to the fact that these facilities do not generate new cash but enable performance guarantees or bonds to be provided on the basis that if they are called, Clough has to pay.

109               In paragraph 18 of Mr Simons’ affidavit of 7 September 2007, he deposes to the fact that if the performance guarantees were paid, Clough would be prevented from achieving some or all of its objectives, with the consequences described in Mr Simons’ 28 May 2007 affidavit.  He was not cross-examined on this paragraph.  Clough will likely be prevented from achieving at least some of its objectives if it were required to pay the performance guarantees.  Clough submits that there is no evidence that ONGC will be affected in any relevant way.

110               Further, as at July 2007, as notified to Clough in September 2007, Atradius, Clough’s underwriter supplier’s for insurance credit facilities, withdrew credit support on grounds including Clough’s dispute with ONGC (and its call on the performance guarantees), and the fact that Clough is now dependent on support from its largest shareholder Murray & Roberts, which support is itself subject to conditions.

111               Finally, Clough submits that its reputation would be affected by a call and payment under the subject performance guarantees and that this is not gainsaid by the assertion that its reputation survived the issues relating to the BassGas dispute and by the assertion that the subject dispute has been publicised.  What cannot be known, Clough says, is the extent to which it lost other projects because of negative publicity relating to the BassGas dispute.  What also cannot be known is the extent to which Clough’s reputation will be further dented if the subject performance guarantees are required to be paid.  That is the very reason, submits Clough, why the potential irreparable damage to reputation needs to be avoided – it cannot easily be a matter of computation at a later time.

ONGC’S SUBMISSIONS

112               ONGC responds to Clough’s submissions as follows:

(a)        The principal significance of statements made in Clough’s Annual Report (Exhibit 7) is that such statements confirm prior disclosures by Clough to the market as to its financial position, refinancing and provisioning and, critically, are inconsistent in key respects with submissions advanced on Clough’s behalf which:

(i)                  suggest that the $160 million loan guarantee facility may not be effective to achieve the purposes for which it was established;

(ii)                cast doubt on the efficacy of the non-core asset disposal program;

(iii)               cast doubt on the adequacy of provisioning;

(iv)              suggest that the provisioning did not have the effect of pigeonholing or isolating the economic impact of the G1 contract; and

(v)                assert that Clough’s financial position is far from secure.

(b)        Clough’s submissions in this respect are unsupported by the evidence, and contrary to Clough’s written disclosures to the market, including its Annual Report published and filed in the course of the hearing of the proceedings. 

(c)        The Court must accept Clough’s publicly disclosed statements and position.  Those statements indicate confidence by the board of Clough that:

(i)         its provisioning in respect of ONGC is adequate;

(ii)        the non-core asset disposal program would be successful;

(iii)       the $160 million loan guarantee facility would enable the implementation of the growth program; and

(iv)       Clough’s financial position was secure.

(d)        Key excerpts from the Annual Report which support the submission made in the previous paragraph are as follows (“G1 Disputes” refers to disputes in relation to the Construction Contract):

(i)         Chairman’s Report

            Importantly, in order to manage the provisions and the growth strategy the Board has approved a refinancing of the Company.  Murray & Roberts will provide loan facilities and guarantees for up to US$185 million and in addition the Company has plans to raise $45 million through a rights issue and placement that will require shareholder approval at the upcoming Annual General Meeting.

            I also take this opportunity to thank our major shareholder Murray & Roberts for their strategic advice and direction during the year.  Their financial assistance has of course been invaluable to the Company and will enable Clough to implement our growth strategy.

            Looking forward, Clough is now moving into a position where the Company has a tremendous opportunity to expand in its key markets.  The operational business has been profitable for the past 18 months and the Company will continue to focus on successful project execution.

            With a recapitalisation approved by the Board, and access to additional funds, the Company will be able to implement a growth strategy that will see us gain access to growing markets that are eminently suited to our core strengths and expertise.  [emphasis added]

(ii)        CEO Comment

            Clearly the past few years have been a very difficult time for the Company, but with the provisions taken we are able to isolate the prior year projects and concentrate on the future.  With the refinancing package in place and a dedicated talented workforce we are equipped for growth.  [emphasis added]

(iii)       CFO Analysis

            The provisions on BassGas and G1 have been established to provide the financial environment against which both contracts can be isolated without further impacting future year’s results.

            The balance will be financial from the recapitalisation proceeds.  In assessing the level of cash to be raised, we have recognised that the Company needs to reduce working capital loans currently provided by Clough’s banking group.  Additionally, we have proposed to raise further cash through the sale of assets which are not core to the group’s focused strategy.  This process and the expected cash to be generated from further Property business disposals will allow the Company to regularise debt levels and provide the necessary cash resources to enable the group to respond to the growing opportunities in the oil and gas market.  The Company has also announced its intention to upgrade the Java Constructor vessel and to acquire additional offshore work vessels.

                        Our banking group maintained their support throughout the year and whilst we remain in default of our banking covenants (driven by the provisioning) the banks have welcomed the proposed recapitalisation announcement. 

                        Cash generated in the year was neutral, however agreements signed will generate net cash inflow of $31m in the current year of which $6m will pay down specific Property related debt.  [emphasis added]

(iv)       Directors’ Report

                        7.  Events Subsequent To Balance Date

                                          Since the end of the financial year the Directors are not aware of any matter or circumstance not otherwise dealt with in this report or consolidated financial report that has significantly or may significantly affect the operations of the consolidated entity, the results of those operations or the state of affairs of the consolidated entity in subsequent financial years apart from the matter noted below.

                              The Company announced on 12 July 2007 its intention to recapitalise the business.  The funding structure has now been finalised and will comprise a fully underwritten renounceable rights issue at 36.8 cents per share to raise $39.4 million and a placement to Murray & Roberts at 36.8 cents per share to raise $5.6 million.  The Company has also agreed a $25 million debt facility and a $160 million loan guarantee facility both provided by Murray & Roberts.  The recapitalisation will allow the Company to deal with the cash flow issues arising from the BassGas and G1 disputes and provide the necessary support for the capital expenditure programme announced by the Company in February 2007.  Additionally the Company announced its intention to complete the disposal of non-core assets, the details of which are being worked through. [emphasis added]

(v)        Notes to the Consolidated Financial Statements 30 June 2007

                        7.  Events occurring after the balance sheet date

                              No matters or circumstances have arisen since the end of the financial year, which significantly affected or may significantly affect the operations of the consolidated entity, the results of those operations, or the state of affairs of the consolidated entity in periods subsequent to the year ended 30 June 2007, apart from the matter noted below.

                              The Company announced on 12 July 2007 its intention to recapitalise the business.  The funding structure has now been finalised and will comprisea fully underwritten renounceable rights issue at 36.8 cents per share to raise $39.4 million and a placement to Murray & Roberts at 36.8 cents per share to raise $5.6 million.  The Company has also agreed a $25 million debt facility and a $160 million loan guarantee facility both provided by Murray & Roberts.  The recapitalisation will allow the Company to deal with the cash flow issues arising from the BassGas and G1 disputes and provide the necessary support for the capital expenditure programme announced by the Company in February 2007.  Additionally the Company announced its intention to complete the disposal of non-core assets, the details of which are being worked through.  [emphasis added]

(e)        Item 10 of the Directors’ Report noted that DPA Singleton (former Chief Executive Officer) “resigned on 9 January 2007 and he received a termination payment of $1,237,500 which included a bonus of $337,500”.  This is inconsistent with a picture of a company in the throes of financial despair.

(f)         Clough’s characterisation of the statement that the subject dispute has been publicised as “assertion” is falsified by Exhibit 3 (extracts from various media reports) as well as by the evidence of Mr Simons under cross-examination, who conceded as much.

(g)        Clough’s statement that “what cannot be known is the extent to which Clough lost other projects because of negative publicity relating to the Bass Gas dispute” is:

(i)         pure speculation; and

(ii)        in any event, irrelevant – the bad publicity and fact of the call on the performance guarantees is already widely known – see Exhibit 3.

(h)        The Atradius document (Exhibit 6) referred to in paragraph 8 of Clough’s submissions is entirely equivocal.  Apart from being part of an incomplete negotiation (there were evidently telephone calls as well as other emails), the email contains the statements “We have allocated the material to cover your requirement” and “Please ensure that the client is aware that we are not looking to go back on Clough cover at this point in time”.

(i)         The significance of the fact that Clough had other bond or performance guarantee facilities was not to suggest that they generated cash, but to counter the original evidence of Mr Simons that raising future performance guarantees would be threatened.

(j)         Similarly, the reference to the non-withdrawal of credit approvals was to highlight the non-materialisation of the fears and concerns to which Mr Simons originally deposed.

113               There is much force in these particular submissions of ONGC.  On the face, of it there is, at least, a difference in emphasis between what Mr Simons, on behalf of Clough, has deposed to, on the question of the financial impact upon Clough should the Banks pay under the performance guarantees, and the position reflected in Clough’s Annual Report, parts of which I have set out above.  Referring, for illustrative purposes, to Item 7 to the ‘Notes to the Consolidated Financial Statement 30 June 2007’, it is difficult to reconcile the statement that the “… recapitalisation will allow the Company to deal with the cash flow issues arising from the BassGas and G1 disputes and provide the necessary support for the capital expenditure programme announced by the Company in February 2007”, with Mr Simons’ written evidence which advances a rather less optimistic view.

114               Nonetheless, there will be consequences and Clough may not be able to achieve all of its stated objectives.  I accept that the $160 million loan guarantee facility may be utilised only for Clough’s vessel investments program and that payment under the performance guarantees prior to the capital raising at the end of December 2007 will adversely affect cash flow.  I also accept that provisions made in Clough’s financial statements in relation to the impact or likely impact of this dispute are not certain.  They are the best estimates which Clough is able to make.

115               Against that, in cross-examination, Mr Simons conceded that Clough’s capital expansion program will be secured by the Murray and Roberts funding and the recapitalisation and that there will be no need to retrench staff.  This is a very different position to that which existed at the time that I refused the application of the Banks to discharge the injunction: Clough Engineering Ltd v Oil & Natural Gas Corporation Ltd [No 2] [2007] FCA 927 at [54]-[63].  There is no evidence to establish specific irreparable damage to Clough.  Consequences of the kind that I have referred to are not uncommon in such matters and indeed are often the probable consequences.  Certainly, Mr Simons accepted that such consequences, broadly, were in the anticipation of Clough when the performance guarantees were given.

REPUTATION

116               I have also considered Clough’s claims that payment under the performance guarantees will adversely affect its commercial reputation.  As to that I accept the submissions of ONGC which derive their factual foundation from the second affidavit of Mr Simons, his cross-examination and various media reports admitted into evidence. 

117               The market knows of Clough’s dispute with ONGC, and it has been the subject of public disclosure to the ASX by Clough.  Clough’s Board has told the market that it considers the claims to be “spurious” and uses public relations to protect its position. 

118               ONGC submits that if it is the call on the performance guarantee that impacts on reputation, as Mr Simons claimed, any such impact has already occurred as that call has been publicised through the judgments of the Court and media reports (Exhibit 3).  The newspaper reports refer to:

            (a)        the disputes between the parties;

            (b)        the fact that ONGC has rejected Clough’s claim for damages;

            (c)        ONGC claims that Clough was in breach of contract;

            (d)        Clough has been “sacked” from the Project; and

            (e)        the fact that the Performance Guarantees had been called upon.

119               Mr Simons accepted that the market generally understands that all that is required for a performance bond to be called on is a claimed breach of contract and not necessarily an established breach. 

120               If maintenance of the injunction mitigates against a perception of ONGC’s entitlement to call on the performance guarantees then, Clough submits, the corollary will be an adverse impact on ONGC’s reputation.

121               The call and payment of the bonds in the Bass Gas dispute which was well known to the market, has not prevented Clough from securing high value construction contracts including $265 million of new oil and gas contracts in July 2006, many of which have involved the provision of performance guarantees. 

122               There is no solid evidence of any loss of business from the calls on the performance bonds in the Bass Gas dispute.  The only concrete illustration given in his affidavit by Mr Simons was in relation to Mitsui & Co, but Mitsui’s concern was not with the fact that performance guarantees were being called on, but more generally because of Clough’s precarious financial position at the time. 

123               Clough it appears, according to Mr Simons, has excess capacity of some $5-6 million in its existing debt facilities to provide future performance guarantees. 

124               Clough submits that greater damage to Clough’s reputation with its financiers will flow from its breach of its various facility agreements by enjoining the Banks notwithstanding Clough’s express authorisation to each of them in those agreements to pay without reference to them, and notwithstanding the fact that Clough might dispute entitlement.  There is considerable force in that submission. 

125               If anything, the maintenance of the injunctions will impair Clough’s position.  In Mr Simons’ second affidavit, he has said that the Banks have each advised him that they will not extend any further facilities to Clough until such time as the injunctions against them are dissolved or otherwise dispensed with. 

126               I would in these new circumstances not accord any significant weight, in considering the balance of convenience, to Clough’s concerns as to its reputation.  

127               I consider, however, that significant weight ought be given to the importance in international commerce of giving effect to instruments such as these performance guarantees: e.g. Olex Focas Pty Ltd v Skodaexport Co Ltd [1998] 3 VR 380 at 403. 

128               For all of the above reasons, the balance of convenience would not, subject to the consideration, should it arise as to the strength of Clough’s case, favour a continuation of injunctive relief.

ORDERS

129               There should be orders in terms of para 1 of the Motion.  Further, the orders granting injunctions against the Banks on 5 June 2007, as extended on 12 and 19 June 2007, should be discharged.  I will hear the parties on the question of costs.

Associate:

Dated:         21 December 2007