Australian Gasfields Ltd v Kvaerner Process Systems Pty Ltd
[2001] WASCA 320
•22 OCTOBER 2001
AUSTRALIAN GASFIELDS LTD -v- KVAERNER PROCESS SYSTEMS PTY LTD [2001] WASCA 320
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2001] WASCA 320 | |
| THE FULL COURT (WA) | |||
| Case No: | FUL:116/2001 | 20 SEPTEMBER 2001 | |
| Coram: | ANDERSON J TEMPLEMAN J | 22/10/01 | |
| 12 | Judgment Part: | 1 of 1 | |
| Result: | Appeal allowed Injunction discharged | ||
| B | |||
| PDF Version |
| Parties: | AUSTRALIAN GASFIELDS LIMITED (ACN 009 330 134) KVAERNER PROCESS SYSTEMS PTY LTD (ACN 005 500 890) |
Catchwords: | Practice and procedure Appeal against granting of interlocutory injunction Whether party who has a bona fide claim is entitled to enforce a security which has been provided as a risk allocation device |
Legislation: | Rules of the Supreme Court 1971 (WA), O 63A Supreme Court Act 1935 (WA), s 60 |
Case References: | Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812 Kvaerner Process Systems Pty Ltd v Australian Gasfields Ltd [2001] WASC 155 Pearson Bridge (NSW) Pty Ltd v The State Rail Authority of New South Wales (1982) 1 ACLR 81 Wood Hall Ltd v Pipeline Authority (1979) 141 CLR 443 Anaconda Operations Pty Ltd v Fluor Daniel Pty Ltd (2000) 16 BCL 230 Austal Ships Pty Ltd v National Australia Bank Ltd, unreported; SCt of WA (Templeman J); Library No 970037; 13 February 1997 Australian Broadcasting Commisison v Australasian Performing Right Association Ltd (1973) 129 CLR 99 Bateman Project Engineering Pty Ltd & Ors v Resolute Ltd & Ors [2000] WASC 284 Bellgrove v Eldridge (1954) 90 CLR 613 Christie v Harvey & Hayward (1900) 2 WAR 146 Esther Investments Pty Ltd v Markalinga Pty Ltd (1989) 2 WAR 196 FFE Minerals Australia Pty Ltd v Vanadium Australia Pty Ltd [2000] WASC 1 L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 Mantegna v Seafeast Sales Pty Ltd, unreported; FCt SCt of WA; Library No 950497; 24 August 1995 Morris v A1 Pools Pty Ltd [2000] WASCA 335 Palata Investments Ltd v Burt & Sinfield Ltd [1985] All ER 517 Reed Construction Services Pty Ltd v Kheng Seng (Australia ) Pty Ltd (1999) 15 BCL 158 TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130 Western Australia v Bond Corporation Holding Ltd (1991) 5 WAR 40 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA TITLE OF COURT : THE FULL COURT (WA) CITATION : AUSTRALIAN GASFIELDS LTD -v- KVAERNER PROCESS SYSTEMS PTY LTD [2001] WASCA 320 CORAM : ANDERSON J
- TEMPLEMAN J
- Appellant
AND
KVAERNER PROCESS SYSTEMS PTY LTD (ACN 005 500 890)
Respondent
Catchwords:
Practice and procedure - Appeal against granting of interlocutory injunction - Whether party who has a bona fide claim is entitled to enforce a security which has been provided as a risk allocation device
Legislation:
Rules of the Supreme Court 1971 (WA), O 63A
Supreme Court Act 1935 (WA), s 60
(Page 2)
Result:
Appeal allowed
Injunction discharged
Category: B
Representation:
Counsel:
Appellant : Mr G R Donaldson
Respondent : Mr P G Clifford
Solicitors:
Appellant : Freehills
Respondent : Gadens Lawyers
Case(s) referred to in judgment(s):
Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812
Kvaerner Process Systems Pty Ltd v Australian Gasfields Ltd [2001] WASC 155
Pearson Bridge (NSW) Pty Ltd v The State Rail Authority of New South Wales (1982) 1 ACLR 81
Wood Hall Ltd v Pipeline Authority (1979) 141 CLR 443
Case(s) also cited:
Anaconda Operations Pty Ltd v Fluor Daniel Pty Ltd (2000) 16 BCL 230
Austal Ships Pty Ltd v National Australia Bank Ltd, unreported; SCt of WA (Templeman J); Library No 970037; 13 February 1997
Australian Broadcasting Commisison v Australasian Performing Right Association Ltd (1973) 129 CLR 99
Bateman Project Engineering Pty Ltd & Ors v Resolute Ltd & Ors [2000] WASC 284
Bellgrove v Eldridge (1954) 90 CLR 613
Christie v Harvey & Hayward (1900) 2 WAR 146
(Page 3)
Esther Investments Pty Ltd v Markalinga Pty Ltd (1989) 2 WAR 196
FFE Minerals Australia Pty Ltd v Vanadium Australia Pty Ltd [2000] WASC 1
L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235
Mantegna v Seafeast Sales Pty Ltd, unreported; FCt SCt of WA; Library No 950497; 24 August 1995
Morris v A1 Pools Pty Ltd [2000] WASCA 335
Palata Investments Ltd v Burt & Sinfield Ltd [1985] All ER 517
Reed Construction Services Pty Ltd v Kheng Seng (Australia ) Pty Ltd (1999) 15 BCL 158
TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130
Western Australia v Bond Corporation Holding Ltd (1991) 5 WAR 40
(Page 4)
1 ANDERSON J: I have had the advantage of reading in draft the judgment of Templeman J. I agree with that judgment and there is nothing I wish to add.
2 TEMPLEMAN J: The question raised by this appeal is whether the learned Judge below erred in law in granting an interlocutory injunction to restrain the appellant from pursuing or making demand under a banker's undertaking.
3 Although the appeal is interlocutory in nature, and has been heard pursuant to O 63A of the Rules of the Supreme Court, it is an appeal as of right: see s 60(1)(f)(ii) of the Supreme Court Act 1935.
4 The nature of the dispute and the circumstances leading to the grant of the injunction are set out in the judgment under appeal: Kvaerner Process Systems Pty Ltd v Australian Gasfields Ltd [2001] WASC 155. The following summary will suffice for present purposes.
5 The appellant is the proprietor of the Eromanga Gas Pipeline Project in Queensland. The respondent is an engineering contractor. On 15 July 1998 the parties entered into a written contract whereby the respondent agreed to carry out the design, supply, construction and commissioning of a gas processing plant, wellhead facilities and a metering station for the appellant's project. The contract price was $9,987,616.
6 General Condition 7.0 of the contract required the respondent to lodge with the appellant a security which was equal to 10 per cent of the contract price. That security was to be provided either in cash or by way of a banker's undertaking in a specified form.
7 The undertaking was given by the Singapore Branch of the Den Norske Bank ASA ("the Bank"). The Bank undertook that on demand being made in writing by the appellant it would pay a sum or sums not exceeding $998,762 to the appellant. The Bank undertook to make payment without any reference to the respondent and irrespective of any notice which the respondent might give to the Bank not to make any payment pursuant to the undertaking. The undertaking was expressed to continue in force until the appellant issued a Certificate of Final Completion pursuant to GC 7.3 and GC 43. No such certificate has yet been issued.
(Page 5)
8 Disputes have arisen between the parties about several matters. These include alleged deficiencies in the design and construction of the plant: and whether practical completion was achieved on 31 August 1999, the date from which the plant produced marketable gas. The appellant contends that subsequent production from the plant has been unreliable and that there has been much lost production, resulting in the appellant's inability to meet its obligations under a supply contract with its customer, Pasminco.
9 The disputes are such that the appellant claims from the respondent some $2.8 million, including $0.9 million for liquidated damages and some $1.2 million for the cost of gas which the appellant says it has purchased from other sources in order to honour its contractual obligations to Pasminco.
10 The appellant holds about $1 million by way of retention moneys. There is a dispute as to the precise amount.
11 Against that background, the appellant contends it is entitled to call on the full amount of the banker's undertaking and to apply the proceeds in part satisfaction of its claims against the respondent. The appellant accepts that the claims may have to be resolved by litigation or arbitration, with the result that some or all of the proceeds of the undertaking may have to be repaid.
12 Being confident of the righteousness of its cause, the appellant made a demand on the Bank by letter dated 11 October 2000. This prompted the respondent to apply for an interlocutory injunction to restrain the respondent from calling on the undertaking. An injunction was granted in the High Court of Singapore but was discharged subsequently for jurisdictional reasons.
13 The appellant made a later demand on the Bank: and the respondent commenced these proceedings for orders including an injunction to restrain the appellant from receiving payment of the amount demanded under the undertaking and for a mandatory injunction requiring the appellant to revoke or withdraw the demand. An interim interlocutory injunction was granted to the respondent on 2 February 2001. The injunction was continued pursuant to an order made on 16 February pending the full hearing on the merits before the Judge below.
14 At the hearing, it was common ground that the only relevant provision of the contract was GC47.0. It provides as follows:
(Page 6)
- "47.0 DEDUCTIONS FROM PAYMENTS
The Company may deduct from any money due or becoming due to the Contractor pursuant to clause 45 or from the security provided by the Contractor pursuant to clause 7 or otherwise:
(a) amounts equal to all debts and moneys due from the Contractor or its Sub-contractors to the Company under or by virtue of the Contract, and
(b) amounts equal to all costs, charges, damages, liquidated sums and expenses which the Company has paid or incurred and which or for which the Contractor or its Sub-contractors is or are liable to bear, pay or make reimbursement to the Company."
- In this clause, the Company is the appellant and the Contractor is the respondent.
15 In his reasons, the learned Judge proceeded on what he described as the tentative view that GC47.0 read with GC7.2 and GC7.3 was intended to define exhaustively the appellant's entitlement to have recourse to the security and to the deductions which the appellant might be authorised to make from money due or becoming due to the respondent or from the security provided by the banker's undertaking.
16 The question arising in this case is whether the appellant is entitled to call on the undertaking when there are disputes about the claims it has made pursuant to the contract.
17 The Judge summarised the rival contentions. The respondent sought to rely on a line of cases commencing with Pearson Bridge (NSW) Pty Ltd v The State Rail Authority of New South Wales [1982] 1 ACLR 81 to the effect that a party may be restrained from calling on an unconditional security where the underlying contract between the parties imposes restrictions on the right to make such a call.
18 Against that, the appellant contended that to impose a restriction on its right to make a demand on what the parties had agreed in the underlying contract would be an unconditional security, would deprive that security of its commercial value. The appellant relied on Wood Hall Ltd v Pipeline Authority (1979) 141 CLR 443 and placed substantial
(Page 7)
- reliance on Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812.
19 The Judge analysed GC47.0 and expressed the further tentative view, for the purposes of the application, that the appellant is entitled to make a deduction in accordance with GC47.0 where it has a bona fide claim to be entitled to make that deduction, notwithstanding that the claim is disputed. It is not necessary to summarise the process of reasoning which led the Judge to that conclusion because it is not suggested that he was wrong.
20 The Judge then set out a passage from the judgment of Callaway JA in the Fletcher Constructions case (supra), in the following terms:
"There are broadly two reasons why the beneficiary may have stipulated for a guarantee. One is to provide security. If it has a valid claim and there are difficulties about recovering from the party in default, it has recourse against the bank. The second reason, which is additional to the first, it to allocate the risk as to who shall be out of pocket pending resolution of a dispute. The beneficiary is then able to call upon the guarantee even if it turns out, in the end, that the other party was not in default. Compare Burley Forest Estate Management Pty Ltd v Cigna Insurance Australia Ltd [1992] 2 Qd R 54 at 59 and Themehelp Ltd v West [1996] QB 84 in the dissenting judgment of Evan LJ at 103. It is a question of construction of the underlying contract whether the guarantee is provided solely by way of security or also as a risk allocation device. Remembering that we are speaking of guarantees in the sense of standby letters of credit, performance bonds, guarantees in lieu of retention moneys and the like, the latter purpose is often present and commercial practice plays a large part in construing the contract. No implication may be made that is inconsistent with an agreed allocation of risk as to who shall be out of pocket pending resolution of a dispute and clauses in the contract that do not expressly inhibit the beneficiary from calling upon the security should not be too readily construed to have that effect. As I have already indicated, they may simply refer to the kind of default which, if it is alleged in good faith, enables the beneficiary to have recourse to the security or its proceeds."
21 The Judge continued:
(Page 8)
- "The concluding observations in that passage are more obviously directed to underlying contracts of a different form and purpose from the present, but their sense may be readily adapted. It is my tentative view of the general conditions of contract that, in this respect, they contemplate that the security is not merely by way of an ultimate security for payment but also to provide for the allocation of financial risk as between the (respondent) and (appellant) pending the determination of disputes over the matters contemplated by GC47.0."
22 Again, it is not suggested that the learned Judge was wrong in his tentative view of the effect of the General Conditions of contract. Issue is joined in relation to the next part of the judgment in which his Honour considered four claims made by the appellant, two of which he held to fall within GC47.0, and two to fall outside it.
23 The appellant contends that the Judge should have found that all the claims were made bona fide, in the sense that they were arguable: or at least, not made fraudulently. On that basis, it is submitted, the appellant was entitled to have recourse to the undertaking. That is because, on the reasoning in the Fletcher Constructions case (supra) the undertaking was a risk allocation device: and the respondent, in providing the security, took the risk that a bona fide claim might be made, albeit a claim which would ultimately require adjudication.
24 The appellant therefore contends that because the Judge did not consider the claims had been made fraudulently, he erred in considering their respective merits. The appellant contends that in any event, the learned Judge erred in concluding that two of those claims fell outside GC47.0.
25 The respondent contends that the Judge was correct in holding that two of the appellant's claims fell outside GC47.0, with the result that they were not bona fide claims. Accepting, for the purposes of the argument, that the other two claims were bona fide, the respondent points out that the amount in issue in relation to those claims was approximately equal in value to the amount of retention moneys held by the appellant, or was covered by insurance policies required by the contract. In those circumstances, the respondent submits, the injunction should not have been continued.
26 I accept the appellant's primary submission that where, as here, a security has been provided as a risk allocation device, the party having the
(Page 9)
- benefit of that security should be entitled to enforce it if he has a bona fide claim: that is, a claim which is not fraudulent. The claim may be weak. But in my view if, for example, competent counsel was of the view that it would be proper to plead it, the claim would qualify as bona fide.
27 On that basis alone, I would allow the appeal. If I am wrong, it is necessary to consider the two elements of the appellant's claims which the Judge rejected. The first was a claim of $466,000 in respect of the estimated cost of future rectification works. The Judge treated it as a claim for $300,000 because it appeared that work to the value of $166,000 had already been undertaken by the respondent.
28 The Judge was of the view that because the estimated costs of rectification were not debts or moneys currently due from the respondent, nor amounts that had been "paid or incurred" by the appellant, they did not fall within GC47.0. Thus, his Honour said, the claim appeared "premature".
29 I am unable to agree with that conclusion. In my view, the cost of future rectifications works is, arguably at least, an amount equal to costs or damages for which the contractor (the respondent) is liable to make reimbursement to the company (the appellant), within GC47.0(b).
30 That being so, it seems to me that the claim should be regarded as a bona fide claim for the purposes of these proceedings.
31 The other claim rejected by the Judge was in an amount of $1,226,880 which the appellant claims to have paid to purchase gas in order to fulfil its contractual obligations to Pasminco. His Honour said of that claim that it appeared not to be related directly to the works to be performed by the respondent under the contract or to the performance of the respondent's contractual obligations, but rather, to a consequential commercial loss involving the respondent's obligations under the separate gas sale agreement between the appellant and Pasminco.
32 The Judge held that while GC47.0(b) included "damages" it was not apparent that a unliquidated claim for damages of that nature was within the intended scope of the provision. Further, his Honour referred to the fact that no allowance had been made for the amount which would be recouped by the appellant from the sale of the gas to Pasminco.
33 Again, I am unable to agree with his Honour's conclusion. The parties were aware of the existence of the gas sale agreement between the appellant and Pasminco when they entered into the construction contract.
(Page 10)
- That being so, it seems to me to be at least arguable that a loss of the kind now claimed by the appellant was within the contemplation of the parties when they entered into the construction contract and would therefore fall within GC47.0(b).
34 In these circumstances, I consider that the claim for damages was bonafide for these purposes.
35 It follows that because the Judge held that the appellant was entitled to make a deduction from the security in accordance with GC47.0 where it had a claim which was bona fide, albeit disputed, his Honour erred in continuing the injunction, thereby denying the appellant that entitlement.
36 In reaching this conclusion, I have had regard to Special Condition 11.0 of the contract which the Judge regarded as an unusual and difficult provision. It provides:
"11.0 LIMITATION OF LIABILITY
Notwithstanding anything else to the contrary, the liability of the Contractor under this Agreement shall be limited to the coverage and sums recovered under the policies of insurance provided by the Company and the Contractor pursuant to this Agreement. Contractor's total liability, whether insured or not, under the Contract or at law, shall be limited to $10m (ten million dollars) except as provided for in clause 9.1(b) of the General Conditions."
- Again, the Company is the appellant and the Contractor is the respondent.
37 The Judge considered there was an arguable case that SC11.0 was intended to limit the respondent's liability to cover provided under insurances required by the contract. If that were so, the Judge said, "it is arguably the case that no financial liability in respect of the present claims would rest with the (respondent) beyond that recovered under the relevant insurance cover".
38 I do not share his Honour's view of SC11.0. In my view, that provision simply limits the respondent's liability under the contract to $10 million: it therefore has no bearing on the outcome of this appeal.
39 In summary, I am persuaded that having formed the tentative view that the bank undertaking was intended to provide for the allocation of financial risk as between the parties pending the determination of disputes
(Page 11)
- about matters contemplated by GC47.0, the Judge should have concluded that the disputes were bona fide, and should not have continued the injunction.
40 Put another way, there was, in my view, nothing in the contract between the parties which inhibited the appellant from making a demand upon the Bank. I agree with the observations of Callaway JA in Fletcher Constructions (supra) that provisions in the underlying contract which "do not expressly inhibit the beneficiary from calling upon the security should not be too readily construed to have that effect".
41 In cases of this kind, the balance of convenience is largely irrelevant. Indeed, the Judge noted that very little had been advanced to him in respect to that matter. Referring to some evidence which suggested that the appellant might be in financial difficulties, the Judge said:
"In any event, however, I would not be persuaded, by virtue of a perceived risk to the (respondent) that it might not be able to recover moneys paid under the Banker's Undertaking from the (appellant) by virtue of the (appellant's) financial position, to restrain the appellant from exercising its rights in respect of the Banker's Undertaking were that otherwise justified in all the circumstances; Hortico (Australia) Pty Ltd v Energy Equipment Co (Australia) Pty Ltd (1985) 1 NSWLR 545 at 553, Bachmann Pty Ltd v BHP Power New Zealand Ltd [1999] 1 VR 420."
- I agree that is the correct approach to take here.
42 On the hearing of the appeal, counsel for the respondent sought to advance a balance of convenience argument on the basis of certain instructions which he had received only recently concerning the appellant's financial position.
43 However, even if there was compelling evidence before the Court about the appellant's financial difficulties (which there was not) I would not regard that as relevant. It would reflect only the realisation of a commercial risk which has nothing to do with the contract between the parties. I assume for these purposes that if the applicant was experiencing financial problems, these were not attributable to a breach of contract by the respondent. If they were, the position would be a fortiori.
44 Nor am I attracted to the proposition that the status quo in this case is represented by the uncalled bank undertaking: and that the status quo should be preserved by injunction. In my view, the status quo is that the
(Page 12)
- appellant has the benefit of a security which has been put in place as a risk-allocation device. The appellant has a bona fide claim to moneys so secured and should not be denied of the benefit of the security. To do so would be to alter the status quo: not to preserve it.
45 For all these reasons I would allow the appeal and discharge the injunction.
1
11
2