Australian Winch and Haulage Company Pty Limited (Administrator Appointed) v Walter Construction Group Limited

[2002] FCA 1181

FEDERAL COURT OF AUSTRALIA

Australian Winch and Haulage Company Pty Limited (Administrator Appointed) v Walter Construction Group Limited [2002] FCA 1181

AUSTRALIAN WINCH AND HAULAGE COMPANY PTY LIMITED (ADMINISTRATOR APPOINTED) v WALTER CONSTRUCTION GROUP LIMITED

N 549 of 2002

ALLSOP J
20 SEPTEMBER 2002
SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N 549 of 2002

BETWEEN:	AUSTRALIAN WINCH AND HAULAGE COMPANY PTY LIMITED (ADMINISTRATOR APPOINTED) APPLICANT
AND:	WALTER CONSTRUCTION GROUP LIMITED RESPONDENT
JUDGE:	ALLSOP J
DATE OF ORDER:	20 SEPTEMBER 2002
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1.The applicant’s notice of motion be dismissed.

2.The applicant pay the respondent’s costs of the motion.

3.Liberty be granted to the parties to approach Allsop J in Court on 23 September 2002 in connection with the position after 12 noon on 23 September 2002.

THE COURT NOTES:   

4.The undertaking, inter partes, to the applicant by the respondent that the respondent will not call on the unconditional undertakings prior to 12 noon 23 September 2002.

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

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N 549 of 2002

BETWEEN:	AUSTRALIAN WINCH AND HAULAGE COMPANY PTY LIMITED (ADMINISTRATOR APPOINTED) APPLICANT
AND:	WALTER CONSTRUCTION GROUP LIMITED RESPONDENT

JUDGE:	ALLSOP J
DATE:	20 SEPTEMBER 2002
PLACE:	SYDNEY

REASONS FOR JUDGMENT

1. The applicant in these proceedings and the applicant to the notice of motion is a subcontractor to a builder, being the respondent, in connection with the construction of a coal mine in Queensland. The applicant by notice of motion dated 16 September 2002 has sought, under s 1324 of the Corporations Act 2001 (Cth), in effect to restrain the respondent from calling upon four unconditional undertakings provided by American Re-Insurance Company to the respondent as beneficiary. I will refer to the these as the "bonds".

2. The precise terms of the relevant order sought in the notice of motion are as follows: 

   1.That leave be granted to the Applicant to file in Court this Notice of Motion and the supporting Affidavits of Scott Macalister Howell sworn 15 September 2002 and Chris Kintis sworn 16 September 2002.

   2.That this Notice of Motion be returnable instanter.

   3.That service of this Notice of Motion be dispensed with.

   4.That the Respondent, its directors, officers, employees, contractors and agents be restrained from:

   (a)making any call or demand upon the American Re-Insurance Company, Unconditional Undertaking Bond Number: 8PFB-A18-2, Unconditional Undertaking Bond Number 8PFB-A18-3, Unconditional Undertaking Bond Number 8PFB-A18-4, and Unconditional Undertaking Bond Number 8PFB-A18-5;

   (b)communicating to American RE-Insurance Company any entitlement or call or demand under the American RE-Insurance Company Unconditional Undertaking Bond Number 8PFB-A18-2, Unconditional Undertaking Bond Number 8PFB-A18-3, Unconditional Undertaking Bond Number 8PFB-A18-4, and Unconditional Undertaking Bond Number 8PFB-A18-5;

   (c)receiving or otherwise dealing with the proceeds of any call or demand under American RE-Insurance Company, Unconditional Undertaking Bond Number 8PFB-A18-2 Unconditional Undertaking Bond Number 8PFB-A18-3, Unconditional Undertaking Bond Number 8PFB-A18-4 and Unconditional Undertaking Bond Number 8PFB-A18-5.

3. I dealt with the matter urgently on 16 September 2002 ([2002] FCA 1162). I heard further argument yesterday, 19 September.

4. It is not clear to me the basis of the application under s 1324 of the Corporations Act.  However, for the reasons I am about to give, I am content in my conclusion that this Court has jurisdiction to hear the application made by notice of motion.

5. The applicant in the application proper filed on 11 June 2002 has sought various heads of relief in this Court, as follows: 

   1. Damages pursuant to the Trade Practices Act (Cth).

   2.   Damages at common law.

   3.   A declaration that any damages, liquidated or otherwise, sought to be imposed on the applicant by the respondent in relation to a subcontract agreement made 3 August 2001 and amended 30 August 2001 between the applicant and the respondent and known as the Grasstree Development Project (the “Subcontract”) are unenforceable.

   4.   Alternatively, a Declaration that any damages, liquidated or otherwise, sought to be imposed on the applicant by the respondent in relation to the Subcontract are limited to $150,000.

   5.   An Order that a bond in the sum of $846,522 issued by American Re-Insurance Company be returned by the respondent to the applicant forthwith.

6. Those claims seeking, amongst other things, damages under the Trade Practices Act1974 (Cth) and an order that the "bond" in the sum of $846,522 be returned by the respondent to the applicant forthwith, are supported by a statement of claim filed on 12 June.

7. In that statement of claim the applicant alleges that various representations were made to it or to its officers by officers of the respondent in or about August 2001 which were in trade and commerce misleading or deceptive.  It is said that, induced by such representations, the applicant entered into the subcontract and entered into a further agreement amending the subcontract on 3 and 27 August 2001 respectively and that it has expended substantial sums of money.

8. The statement of claim then goes on to plead, one assumes, a contractual breach of the subcontract by requiring the applicant to lodge a further performance bond in the sum of $696,522.  The particulars to that identify it as being a further bond above and beyond an original bond of $150,000.  It is not clear on the pleadings what is alleged to be the relationship between that alleged breach and the misleading and deceptive conduct, beyond a temporal one.

9. I will deal in due course with what apparently occurred in relation to the provision of the further bonds up to a total of $846,522. It is sufficient to say at this point that on the material before me, to describe the case about breach of the subcontract in the provision of the further bonds as weak would be a significant overstatement.

10. From the statement of claim one assumes that the orders sought in the application for the return of the single bond as to $846,522 is supported by the allegations of breach in relation to the further bonds beyond $150,000, and, in relation to the $150,000 bond, by the allegations of misleading and deceptive conduct. 

11. I enunciate these matters out of the pleadings, because they found my conclusion of satisfaction that the debate, which has been before me this week, and in respect of which I now give judgment, about the entitlement of the respondent to call upon the bonds, is bound up in the same matter with the allegations identified in the statement of claim.  It could not be fairly said, I think, that the matters with which I am about to deal can be said to be wholly disparate or separate from the matters pleaded in the statement of claim.  It is also clear from the jurisprudence of this Court and the High Court that the weakness, if it be a weakness, of the ultimate claim brought by the applicant in the statement of claim, if the claim is not colourable (as referred to by the Full Court in Burgundy Royale Investments Pty Ltd v Westpac Banking Corporation (1987) 18 FCR 212) does not affect the jurisdiction of the Court.

12. As I said, the applicant is a subcontractor of the respondent.  The negotiations, which were entered between the parties in mid-2001, and the subcontractual arrangements which they entered in August 2001, were concerned with the supplying, hiring, installing and commissioning of shaft sink equipment to what is called the Grasstree Development Project in Queensland.  The work also involved constructing and commissioning separate number 1 and number 2 hoisting systems and associated works.  The development is, I gather, the construction of what was referred to in debate as a greenfield coal mine in Queensland, not open-cut but underground, hence the need for a shaft.

13. The parties are agreed that there were important discussions on the 3 August 2001 about entry into the subcontract.  This was the occasion, according to the applicant, of the misleading or deceptive representations. 

14. When this matter was first before me for argument on Monday, 16 September, I ordered the applicant to file an affidavit of facts and circumstances substantiating its claims in the statement of claim.  In compliance with that, an affidavit of Ian Oswald Nicholls was sworn on 19 September and read in Court.  He outlines the complaints of the applicant. 

15. For today's purposes it is sufficient if I say that the force and strength of the misleading or deceptive conduct claim under s 52 is less than clear to me by reference to Mr Nicholls’ affidavit but more importantly, for the purposes of the disposition of this week's debate, I see little foundation, in his affidavit, for the claim that the second, third and fourth bonds were provided in some fashion in breach of a legal obligation.  I leave aside the difficulty of this proposition absent a pleading of economic or physical duress, given that the provision of the bonds required the consensual act of the applicant, itself.

16. In fact, there were four bonds given.  They are identified in a series of annexures to the affidavit of Mr Chris Kintis of 16 September.  They are all in relevantly identical form, save for the amount of money.  All were given on 27 November 2001, that is, I note, after the totality of the contractual arrangements were entered.  For the purposes of the balance of these reasons it needs to be appreciated at all times that the bonds were unconditional, that is, that upon demand American Re-Insurance Company unconditionally agreed to pay the sum demanded by the respondent.  To use the parlance that is sometimes used in discussion of these kinds of matters, it was a clean bond, untrammelled even by the need to provide certificates of breach or the like which sometimes appears in these kinds of instruments.  The bonds were each in the following terms:

    AMERICAN RE-INSURANCE COMPANY
    (ARBN 000 857 698)

    UNCONDITIONAL UNDERTAKING

    At the request of Australian Winch & Haulage Co. Pty Limited ABN 16 001 234 617 (the Contractor”) and in consideration of Walter Construction Group Limited ABN 78 008 390 074 (“the Principal”) accepting this undertaking (“the Undertaking”) In relation to the contract for the Contractor’s performance obligations in respect of the “Grasstree Development Project” subcontract works for the supply, installation and commissioning of two sets of shaft sink equipment and the hiring of that equipment together with Coal A Hoisting System and a Man and Materials Hoisting System located off Grasstree Road, via Middlemount, Queensland.

    AMERICAN RE-INSURANCE COMPANY (called the “Surety”)
    C—AP Surety (Australia) Pty Limited
    Level 12, 167 Macquarie Street, Sydney, NSW 2000

    Unconditionally undertakes to pay on demand any sum or sums which may from time to time be demanded by the Principal to a maximum aggregate sum of A$150,000.00 (One Hundred & Fifty Thousand Dollars Only).

    The Undertaking is to continue until notification has been received from the Principal that the sum is no longer required by the Principal or until this Undertaking is returned to the Surety or until payment to the Principal by the Surety of the whole of the sum or such part as the Principal may require.

    Should the Surety be notified in writing, purporting to be signed by an authorised representative of Walter Construction Group Limited for an on behalf of the Principal that the Principal desires payment to be made of the whole or any part or parts of the sum, it is unconditionally agreed that the Surety will make the payment or payments to the Principal forthwith without reference to the Contractor and notwithstanding any notice given by the Contractor not to pay same.

    Provided always that the Surety may at any time without being required to do so to pay to the Principal the sum of A$150,000.00 (One Hundred & Fifty Thousand Australian Dollars) less any amount or amounts it may previously have paid under this Undertaking or such lesser sum as may be required and specified by the Principal and thereupon the liability of the Surety hereunder shall immediately cease.

    The laws of the legal jurisdiction of Queensland apply to this Undertaking.

    Signed by the attorney of American Re-Insurance
    Company under power of attorney dated 10th July
    1998, this 27^th day of November, 2001 in the
    presence of:

17. The circumstances leading to the separate existence of these bonds and their separate amounts can be understood by reference to some of the evidence given before me in conjunction with understanding the original contract and the variation.  The original contract was for a contract value of $3,127,900.  A subcontract agreement was entered for the performance of the work in that contract.  That subcontract contained clause 5(c) under the heading “Payments”.  It was in the following terms:

    5.Payments

    …

    (c)The Builder may retain as retention, a percentage of monies becoming due under this Subcontract as stated in the Appendix.  One half of The monies so retained will be released on Practical Completion of the Head Contract Works and the other half (less any amount properly claimed by the Builder pursuant to this Subcontract) will be released when the Proprietor releases the retention or security held under the provisions of the Head Contract provided the Subcontractor has complied with its obligations under this Subcontract.

    …

18. The part of the appendix which is referrable to it was entitled Retention and contained the following:

    5(c)         Retention             Bank Guarantee 10% for $150,000 – submitted within 14 days of execution of Subcontract.

19. The terms of cl 5(c) and the appendix in this respect are explained in the affidavit of Mr Pearson, whose evidence was not contradicted.  Mr Pearson, an officer of the respondent, said in [8] – [10] of his affidavit that there was a conversation with, amongst other people, Mr Hemsworth and Mr Nicholls on behalf of the applicant.  Mr Nicholls, of course, gave evidence by affidavit and it should be noted that Mr Hemsworth was in Court during the whole of hearing on Thursday, 19 September, so if any part of Mr Pearson's affidavit was inaccurate, there was ample opportunity to contest it.

20. Mr Pearson said that in the course of the meeting cl 5 of the commercial conditions was discussed and there was a copy of the page with cl 5 present at the discussion.  Mr Pearson says that Mr Hemsworth said the following:

    “I am not happy with providing 10% security.  It is too high since the equipment which we will be supplying under the shaft sink will be on a hire only basis.  There shouldn’t be security during any defects period because the temporary equipment will be removed and Grasstree will be putting in permanent equipment.  Our equipment will not be on site after completion and we should not have to give security for the defects period.”

21. The discussion thereafter continued and one of Mr Pearson's colleagues from the respondent said the following:

    “We agree that the security can be reduced.  We think the security should be reduced to 5% of the contract value”.

22. To which Mr Hemsworth said:

    “Well what value is that?”

23. To which Mr Pearson's colleague said the following:

    “We will agree to AWH providing security of $150,00.00.  It will need to be submitted up front after the signing of the contract.”

24. This explains the changes to the clause and schedule.  I stop at this point merely to note that the parties were discussing the matter in terms of the "security".  The importance of this will become evident in due course.  The subcontract agreement proper also contained the following clauses: 

    cl 13 [from the subcontract agreement]

    13.Insurance

    The Subcontractor and the Builder’s insurance obligations are as set out in Clause P12 of the Subcontract Preliminaries.

    cl P12 [from the “Subcontract Project Specific Preliminaries”]

    P12        LIABILITIES, INDEMNITIES AND INSURANCE
    P12.01   Damage to Property and Injury to persons

    The Subcontractor will be liable for and indemnify the Builder and hold it harmless from and against any losses, damages, costs (including without limitation, legal costs), claims, proceedings and demands which the Builder may suffer or incur in respect of:

    (a)loss of or damage to any property; or

    (b)injury to or death of any person,

    in relation to or arising out of the carrying out of the subcontract Works and resulting from the negligence, omission or default of the Subcontractor or any person for whom the Subcontractor is responsible.

    P12.02Contractor’s Risk Insurance

    The Proprietor has agreed to effect and maintain insurance in the joint names of itself, the Builder and all of the subcontractor’s for their respective rights, interests and liabilities under a Contractors Risk policy covering all of the Works to be carried out by the Builder under its Head Contract with the Proprietor until completion of such works.

    The Subcontractor must pay any excess/deductible payable under that policy in respect of any claims made in relation to any act or omission on the part of the Subcontractor or any person for whom the Subcontractor is responsible.

    A copy of the Contractors Risk policy taken out by the Proprietor is available for inspection by the Subcontractor in order that the Subcontractor may satisfy itself as to the provisions, terms, conditions, exclusions, and any exemptions in the policy.  The Subcontractor is deemed to have satisfied itself as to all the relevant provisions of the policy prior to entering into the Subcontract with the Builder.

    If, for any reason, a claim is issued under the Builders Insurance Policy, the Subcontractor will be responsible for the first $1,000,000.00 excess.  A Contractors Risk policy in the joint names of itself, the Proprietor and the Builder, should be effected up to $1,000,000.00.

    P12.03Workers Compensation Insurance

    The Subcontractor must effect and maintain insurance for an amount not less than that required by any legislation against any liability, loss, claim or proceedings whatsoever whether arising by virtue of any statute relating to workers compensation or employers liability or at common law, to or by any person employed by the Subcontractor in or about the execution of the Subcontract Works, and hold harmless the Builder against any liability, loss, claim or proceeding which may arise.

    P12.04Liability to Third Persons or Property

    The Subcontractor must effect and maintain insurance liability to third person or in respect of property of third persons in an amount not less than $10 million and in the joint names of the Subcontractor, the Builder and the Proprietor.  The policy must include cover for product liability.

    P12.05Constructional Plant

    The Subconractor Builder will effect and maintain Plant and Equipment insurance for its own plant and any other plant the Subcontractor may hire or be responsible for  the Builder hires from the Subcontractor under this Agreement.

    P12.06Terms of Policies

    Policies effected by the Subcontractor under the Clause P12, with the exception of Clause P12.03 must include clauses providing that:

    (a)failure by any insured to observe and fulfil the terms of the policy must not prejudice the insurance in regards to any other insured;

    (b)where the insurance is effected in joint names, then all insuring agreements and endorsements with the exception of limits on liability will operate in the same manner as if there were a separate policy of insurance covering each of the insured; and

    (c)the insurer waives all rights, remedies and relief to which it might become entitled by subrogation against any of the insured.

    (d)in relation to Clause P12.02, they allow for a Difference in Conditions/Difference in Excess extension; and

    (e)in relation to Clause P12.04, they allow for a Waiver of Subrogation, Cross Liability and Contractual Liability Extensions.

    P12.07Evidence of Insurance

    The Subcontractor must provide to the Builder, on or before entering into the Subcontract and at any other time on request by the Builder, evidence that all insurances required to be effected and maintained by the Subcontractor have been effected and are current.

    The Builder may without any payment which would otherwise become due and payable to the Subcontractor until the Subcontractor provides evidence of the currency of the insurance policies which the Subcontractor is required to effect under the Subcontract.

    If the Subcontractor fails to produce evidence satisfactory to the Builder of the policies of insurance which the Subcontractor is required to effect and maintain, within a reasonable period after a request from the Builder, the Builder may take out the policies itself and the premiums for such polices will be a debt due and owing from the Subcontractor to the Builder and may be deducted from any payment then due and any future payment to the Subcontractor.

    P12.08   Breach of Policy by Subcontractor

    If either the Builder or Proprietor makes a claim under the Contractor’s Risk policy effected under P12.02 or the policy effected under P12.04 respectively, which is not paid in full by the insurer by reason of any act, default or omission by the Subcontractor under this Subcontract, or breach of any provision of the policy by the Subcontractor or any person for whom the Subcontractor is responsible, then the Subcontractor will:

    (a)assume fully all responsibility for the risks; and

    (b)indemnify the Builder against any losses, damages, costs (including without limitation, legal costs), claims, proceedings and demands which the Builder may suffer or incur by reason of or in relation to the non-payment or insufficient payment of such claim.

    P12.09   Obligations not affected

    Nothing in this Clause P12 will limit any obligation or liability of the Subcontractor under this Subcontract.

    P12.10Professional Indemnity Insurance

    Where the Subcontractor undertakes responsibility for design and documentation as indicated in Clause P15.01.01 of these Preliminaries, the Subcontractor must, within fourteen (14) calendar days of receipt of notice of acceptance of the Subcontractor’s tender, effect a Professional Indemnity policy, on terms reasonably acceptable to the Builder, of not less than $5,000,000.  A policy of Professional Indemnity Insurance, must be maintained for a period for not less than six (6) years after completion of the Subcontract Works.

    Where the Subcontractor is required, under this clause P12.10, to provide Professional Indemnity Insurance, evidence of the policy effected by the Subcontractor, satisfactory to the Builder, as a condition precedent to any payment to the Subcontractor by the Builder, under this Subcontract.

    P12.11Warranty from Consultant’s

    If requested by the Builder and within fourteen (14) days of receipt of notice of acceptance of the Subcontractor’s tender, the Subcontractor must:

    Procure from those of its Consultant’s who provide any certificate (including but not limited to an engineer’s certificate) in relation to the adequacy of the Subcontract Works (including, without limitation, a certificate in connection with the erection of scaffolding, formwork or demolition) a warranty in the form attached as Annexure 1 to this document.  Provision of original warranties properly executed by all of the Subcontractor’s relevant consultants is a condition precedent to any payment to the Subcontractor by the Builder under this Subcontract.

    cl 15 [from the sub-contract agreement]

    15. Builders Right to Deduct Cost, Damages & Expenses

    Without limiting the Builder’s right under any other provision of this Subcontract, or the Builders rights at common law to damages or other remedy, all monies due from the Subcontractor to the Builder and all costs, damages or expenses which the Builder may have paid or may have incurred, for, or in respect of which, under this Subcontract the Subcontractor is liable to make reimbursement to the Builder but has failed to so pay or reimburse to the Builder, may be deducted by the Builder from all monies due, becoming due or to become due from the Builder to the Subcontractor, including retention monies, or may be recovered from the Subcontractor by action at law or otherwise.

    cl 22 [from the sub-contract agreement]

    22.Defects

    (a)The Subcontractor shall make good all defects that may appear in the Subcontract Works after Completion of the Subcontract Works and prior to the expiration of the Builder’s Defects Liability Period under the Head Contract (as stated in the Appendix) or any extension of such period.

    (b)If any defects become apparent after Completion of the Subcontract Works and prior to the expiration of the Builder’s Defects Liability Period under the Head Contract (as extended), then the Builder may issue an instruction to the Subcontractor setting out the defects and a reasonable time within which the Subcontractor must complete the making good of those defects.

    (c)The Subcontractor shall complete the making food of all defects or omissions notified by the Builder under clause 22(b) within the reasonable time specified by the Builder.  If the defect is not made good within the time stipulated, the Builder may have the defect made good by others at the Subcontractor’s cost.  The Builder may deduct the cost of engaging others to make good the defect from any amounts owing to the Subcontractor.

    (d)All defect, whether due to materials and/or workmanship not being in accordance with this Subcontract, shall be made good by the Subcontractor at no cost to the Builder.

    (e)The Subcontractor must give the Builder notice in writing when, in the Subcontractor’s opinion, all defects and faults referred to in the notice issued under clause 22(b) have been made good.  The Builder may give the Subcontractor notice in writing of any defects or faults (if any) which remain to be made good and a further reasonable time within which the defects and faults must be made good.

    (f)If the Subcontractor fails to make good any further defects or faults notified under clause 22(e) within the stipulated time, then the Builder may have those defects or faults made good by others.  All costs properly incurred by the Builder in so doing may be recovered by the Builder as a debt due to the Builder by the Subcontractor.

    (g)Notwithstanding any other provision in this Clause 22, the Builder may instruct the Subcontractor not to make good any defective work or do any work not done in accordance with the Subcontract.  Following receipt of such an instruction, the Builder and the Subcontractor will endeavour to agree on the amount to be deducted from the Subcontract Price.  Failing agreement, the amount of the adjustment shall be as determined by the Expert in accordance with clause 6(d) as a reasonable deduction for the defective work.  In making a determination, the Expert must have regard to the deduction (if any) for the defective work under the Head Contract.

1. The subcontract also contained as part of its provisions section 4 of the general conditions of contract taken from the head contract between the principal and the respondent. Various provisions in that body of general conditions had been excised and initialled.  I note in passing that there appears to have been one error in excision in that I do not think that the first five lines of the clause for practical completion, GC46 on page 106 of exhibit “CK1”, was intended to remain unexcised given the excisions which have occurred on the following two pages.  Nothing turns on that.

2. Another feature of the excisions and notations in section 4, is that in one clause, cl 35.4, an attempt has been made to make some particular changes using the terms properly describing the parties.  The explanation for these changes is apparent from the face of them and the fact that the word subcontractor was used to properly explain a document does not lead to the conclusion that the balance of the clauses unexcised are not relevant merely because they use the names of or the references to the parties in the head contract.  By that I mean sensibly one looks at the word contractor as subcontractor and company as builder, so as to bring the general conditions of contract in section 4 incorporated into the contract unexcised into line with the phraseology used in the subcontract.

3. The general conditions of contract included a clause GC10 entitled “Security”.  It was in the following terms:

   GC 10SECURITY

   10.1Within seven (7) days of the Date of Award, the Contractor shall at the Contractor’s own expense, provide security in the form of an unconditional bank guarantee in accordance with Appendix 3 (the “Bank Guarantee”) and by a bank approved by the Company not as a deposit liable for forfeiture but as security to the Company for the due and timely performance of the obligations of the Contractor under the Contract.

   10.2The amount of the security shall be the amount stated in Appendix 1 and upon the issue of a Certificate of Practical Completion, the Company’s entitlement to such security shall be reduced to the percentage stated in Appendix 1.

   10.3The Company is entitled to draw on the Bank Guarantee for any reason whatsoever up to the expiry of the Defects Liability Period upon breach of the contract by the Contractor where such breach is not remedied within thirty (30) days after written notice of the breach has been given to the Contractor.

   10.4The amount of the Bank Guarantee may be adjusted in the Company’s sole discretion in proportion to any variation in the Contract Sum resulting from variations of the works pursuant to GC 34.  The Contractor shall, upon the occurrence of any such variation promptly and at its own expense arrange for the submission to the Company of a proportionate revision of the Bank Guarantee.

4. The applicant says that GC10 qualified the bank guarantee contemplated for by cl 5(c).  That identifies one of the central questions for my consideration today. 

5. A number of things should be noted about GC10 and its position in the contract.  First, the appendix 1, which is referred to in subcl 10.2 has been excised.  There is no separate security amount referred to in any appendix taken directly from subcl 10.2.  Secondly, there is an inconsistency in time between cl 5(c) and subcl 10.1.  Clause 5(c) in the appendix to the subcontract requires the provision of the security by way of bank guarantee in fourteen days.  Subclause 10.1 requires it in seven days.  Thirdly, cl 5(c) refers specifically to a retention fund, whereas cl GC10 refers to “security for the due and timely performance of the obligations under the contract”.  Also, fourthly, in the context of understanding GC10 one should recall what I said earlier, that the discussions between Mr Pearson and Mr Hemsworth and others did discuss “security” and in that light did discuss and deal with specifically cl 5(c).

6. It should also be noted that GC 10, as is not uncommon in these sorts of provisions, provides for the halving of the security after practical completion. 

7. There is a difference in contracts of this kind between retention funds and security for due and timely performance of the obligations under a contract.  It is nevertheless the case that the ultimate purpose of a retention fund is to provide a measure of security to the principal or head contractor, depending upon whether one is dealing with the principal contractor or the subcontractor.  But there is a well known distinction, and it is reflected in one of the seminal High Court cases: Wood Hall Ltd v The Pipeline Authority (1979) 141 CLR 443, where the distinction was drawn between “retention bonds” and “performance bonds”.

8. Retention funds or retention bonds, on the one hand, and performance guarantees or performance securities, on the other, do fulfil a similar purpose but, nevertheless, to the extent that a fund or a bond can be properly and only understood as described as a retention fund, it is more likely to be seen as one available to the payer under the contract, for deductions and the like contemplated by clauses such as cl 15.  To the extent that a retention fund is agreed to be provided by bond, and no other reference affects the rights of the parties in relation thereto, one would hesitate long before concluding that there was an arguable case that the payer could not convert the bond into cash and let it stand as retention funds.  It is important, in this regard, to recognise that cl 5(c), notwithstanding the deletions and changes, reflecting a bank guarantee, refers to “monies”. 

9. It is also important, however, in understanding the role of GC10, to understand that, at least on the evidence before me, the general conditions of contract from the head contract imported into the subcontract, do not contain a separate provision for a retention fund.  Security is provided under GC10.  It is not absolutely crystal clear that GC10 does not refer to the bond provided under cl 5(c). 

10. The subcontract provides for a retention fund by a bank guarantee.  Mr Pearson and others, before entry into the contract, discussed this in terms of “security”.  The general conditions of contract do not provide for a retention fund, but do provide for “security”, though in terms of security for due and faithful performance of the contract by way of a bank guarantee.

11. It is also clear, from the evidence before me, that the parties intended, as far as possible, that the security arrangements in relation to the head contract and the subcontract would be back to back.  Thus, to the extent that there appears to be an absence of a retention fund, specifically so called, in the general conditions of the head contact, it may well be a factor which aligns GC10 in the general conditions with cl 5(c) in the subcontract.  I will return to these considerations in due course.

12. It will be recalled that the bonds were given by an insurance company.  They were not, strictly, bank guarantees.  The fact that they were not guarantees (in the sense of surety instruments) properly so-called I do not think matters.  In the parlance of this area of the law what are called guarantees are not strictly speaking guarantees.  A clean unconditional undertaking is often referred to as a guarantee.  Indeed, the notion of it being a bank guarantee is probably as much referable to the importance of its direct call as it is to the nature of the institution supplying it.  In any event, the parties agreed upon an insurance company giving an unconditional bond.

13. It is necessary to come to the variation by way of extension to the contract executed later in August.  The understanding of the variation and how it was discussed by the parties prior to its execution explains the giving of the three further bonds.  Once again it is necessary to refer to Mr Pearson's evidence.  In early August 2001, at the time of the finalisation of the subcontract, there were discussions concerning the extension of it involving the provision of permanent head frames and permanent hoisting gear and other ancillary equipment.  These discussions proceeded.  They ultimately bore fruit in the execution of the variation which increased the contract value from $3,127,900 to $10,093,115, an increase of $6,965,215.  On 27 August 2001 Mr Pearson caused an e-mail to be sent to Mr Nicholls.  The e-mail included two paragraphs which were in the following terms: 

    GDPL [the principal of the respondent] require the 10% Security is to be increased in proportion to the contract value (ie 10% of the variation value to AWH to be provided to WCG, on top of the security provided under the original contract).

    GDPL require a $100,000 security be held for the period during which the head frame and winder on NO 2 shaft are in use by GDPL.  Your agreement to a separate insurance bond/Bank Guarantee for $100,000 being issued prior to Final Completion is probably the easiest way of dealing with this, so that once the defects period has expired, all of the security apart from the $100,000 is released.

14. In these paragraphs, the applicant was told that the principal required a security of 10% of the increase in value.  There was a reply to this e-mail on the same day.  The reply was in the following terms:

    We will provide security of 10% of contract value as required practical completion of contract.

    We will provide a $100,000.00 security whilst the headframe and winder on No.2 shaft are used by GDPL with all other bonds being released by GDPL.

15. It shall be recalled that in GC10 there was to be a halving of security at practical completion.  Discussion in this context took place between Mr Pearson and Mr Hemsworth, Mr Pearson saying to Mr Hemsworth:

    “We require the $150,000.00 security until you have reached completion of the subcontract works.  This will take place in October 2002.  If we award you W51 then AWH will need to increase the amount of security held under the subcontract by 10% of the value of W51.  That amount is expected to be $696,522.00.  It would be preferred if you gave us three further separate securities.  One for $348,261.00.  That bond would be held until practical completion of the subcontract works.  A second bond for $248,261.00, which would be released in October 2003, after the first defects liability period had expired.  A third bond of $100,000.00 which would be released when the hire period ended in approximately 2005”.

16. Mr Hemsworth replied as follows:

    “AWH is prepared to provide those securities.”

17. It is plain from that conversation that the parties anticipated a halving of the security after practical completion, but they needed to deal with a sum of $100,000 which was to remain after practical completion for a different defects liability period to the balance of the work.  Thus the parties came to agree upon the terms of cl 13 of the variation, that is special condition 13.  It was in the following terms:

    13.1The parties agree that two (2) separate Defects Liability Periods will apply to the Works as follows:

    (a)the first Defects Liability Period will apply to the Works under the Subcontract for a period of 12 months from the Date of Practical Completion and for which the Builder will retain security for 5% of the Subcontract Sum in accordance with the General Conditions of Subcontract;

    (b)the second Defects Liability Period will apply only to the No.2 Shaft Production Hoisting System for a period of 64 weeks commencing from the expiry of the first Defects Liability Period and for which the Builder will retain security in the amount of $100,000 and GC 47 will apply accordingly.

    13.2Notwithstanding General Condition 48, the Builder Representative is not obliged to release any security being held for the first Defects Liability Period at the time of issue of the Certificate of Final Completion until the Subcontractor provides security to the Builder for the second Defects Liability Period in the form of an unconditional bond on terms and conditions approved by the Builder or in such other form approved by the Builder.

18. There is one peculiarity in relation to the construction of cl 13.1 which I think is solved by reading the clause purposively in the light of the commercial aim and purpose identified in the discussion between Mr Pearson and Mr Hemsworth.  It could be seen, looking at subpars (a) and (b), that they are additional or cumulative, that is that there would be a 5% security for the subcontract sum and then in addition to that, a $100,000 security for the matters referred to in subpar (b).  However, from Mr Pearson's evidence two things are tolerably plain.  One is that the “subcontract sum” is the increased variation contract sum and, secondly, the sums in subpars (a) and (b) are intended together to add to 5 % of the increased value. That is what Mr Pearson says.  He says that after practical completion, the $348,261 bond representing 5% or one half of 10% of the increased contract sum would be returned along with the $150,000 bond given under cl 5(c), and remaining until the expiration of the two various defects liability periods would be two further bonds, one of $248,261 to be released in 2003 and the other for $100,000 to be released in approximately 2005.  Those two latter bonds added together are equal to the single bond of $348,261 which would be returned on practical completion.

19. Though these discussions and this variation were in a sense post-contractual to the entering into of the agreement on 3 August 2001, it is a discussion before any of the bonds are given and before the contract in its current form was signed.  The conversation of Mr Pearson and a perusal of the original contract and the variation assists in understanding the logic of the different sums in the four bonds and, in addition to the absence of any cogent evidence or, indeed, any real evidence in Mr Nicholl's affidavit as to the breach alleged in the statement of claim, it compounds the difficulty that the applicant has in indicating that any of these bonds were in some fashion obtained by reason of a civil wrong.

20. Therefore, for the purposes of the balance of these reasons I place little or no weight on the notion of protecting the subject matter of the suit to the extent that that can be said to be the bonds uncalled in the form they exist in the hands of American Re-Insurance Company. 

21. The above explains, as I said, cll 13.1 and 13.2 in the variation.  This clause deals with differentiated defects liability periods and the decreased security which would obtain thereafter.  In clauses of this kind, sometimes one sees the requirements to provide fresh security after practical completion upon delivery up of the former security obtaining prior to practical completion.  The parties dealt with this in advance by splitting up the bonds into the different values to avoid the administrative cost and potential difficulty of obtaining a bond in the future once relationships had advanced to a point of no return.  Thus, to the extent that cl 13.1 is referring to two of these four bonds, it is referring to them as bonds referable to a period after practical completion. The parties have not reached practical completion.  Thus, the bonds should be looked at not by reference to the latter two being security for the period from practical completion to the end of the respective defects liability periods, but as security given for the period prior to practical completion.

22. The respondent claims that the applicant has committed various serious breaches of contract.  Many are said to result in monetary consequences as well as significant delay.  There are also various non-monetary breaches of different degrees of apparent seriousness.  I will need to return to the discussion of this evidence in due course. 

23. The question is what entitlement does the applicant have to restrain the respondent from calling the bonds which are instruments given by a third party in its favour which on their face are entirely unconditional and which it is common ground contain obligations to be fulfilled by American Re-Insurance Company should a demand be made.  As I said earlier in these reasons, it is vital to appreciate that the bond contemplated by the contract, that is by GC10, is entirely unconditional.  It is also worthy of note that the appendix to the subcontract referred to a bank guarantee.  As I said earlier, the notion of a bank guarantee in short form carries with it, in my view, not so much the identity of the institution but the unconditional nature of the right to be given to the beneficiary of the instrument.  Those matters, that is the nature of the third party right to be given to the head contractor respondent, is a factor in both construing the balance of the contract in the ascertainment of the rights of the parties in connection with these bonds (see in particular Bachmann Pty Ltd v BHP Power New Zealand Ltd [1999] 1 VR 420) but also, in my opinion, in weighing the balance of convenience.

24. I will come in due course to the balance of convenience.  The applicant must identify a contractual provision of a negative kind providing the foundation for the legal restraint upon the respondent in exercising unquestioned rights it has against the provider of the bonds. It will be either express or implied or to be construed out of the terms of the contract, the latter is often referred to as an implication, but properly speaking it is a question of understanding the words in their context in the contract.  The applicant identifies two sources, first cl 10.3 and second, a general implication from the contract. 

25. As to the second matter, the general implication from the contract, if it be the case that subcl 10.3 does not govern the calling of these bonds, I reject the argument that there is any general implication from the contract limiting the calling of these bonds.  Such an implication would have to be an implication proper and in my view governed by BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266. This is not the type of contract referred to by the High Court in Byrne v Australian Airlines Ltd (1995) 185 CLR 410 when a number of members of the High Court, adopting what Deane J had said in Hawkins v Clayton (1988) 164 CLR 539, ameliorated the stringency of BP Refinery (Westernport), supra, in contracts not obviously complete on their face in detailed form.  Here there is a detailed comprehensive building contract. 

26. Thus one needs to turn to cl 10.3.  The respondent says first, as its primary position, that the clause does not apply at all, that we are not dealing here with, prior to practical completion at least, a security at all in terms of subcll 10.1 or 10.3, being a security for the due performance of a contract.  Rather we are dealing with retention fund monies.  The matters to which I have referred I think make it arguable that cl GC10 was intended by the parties to apply to the securities provided, at least in relation to the three securities beyond the $150,000.  The parties discussed "security".  Security was to be back to back with the head contract.  The head contract, at least in its general conditions, did not separately identify retention funds.  The parties did not discuss cl 5(c) other than as “security”.  They discussed the additional security in the context of cl 5(c) in that in Mr Pearson's e-mail to Mr Nicholls, he refers to it as "on top of the security provided under the original contract".

27. One view is, I think, that GC10 as far as it is sensibly able to be read governs the provisions of security by way of the retention fund both in relation to the $150,000 and the further three bonds.  Another view is that all these securities for the subcontract can be seen, prior to practical completion, as only a species of retention fund under cl 5(c) and that the grant of further bonds, that is, the continued retention of the latter two, might be governed by the general conditions, but prior to then, all the bonds were really on top of, or in addition to, the cl 5(c) $150,000 bond.  That argument is also not without force.

1. Another argument is that the $150,000 bond given plainly under cl 5(c) is just a retention bond and no more, not governed by GC10, but the additional bonds pursuant to a collateral written agreement in the e-mails, picked up in the variation arrangement as back to back security and were intended to be governed by the general conditions including GC10.

2. Given the terms of cl 5(c) there is, I think, a powerful argument that the $150,000 is a guarantee in lieu of cash and that the entitlement to transform the guarantee into cash does not depend on satisfying cl 10.3 but it is to be seen as a retention fund by cash or, in lieu, a call demand.  The clause itself refers to monies though compliance, at least initially, is to be satisfied by provision of the bank guarantee.

3. The further bonds are more difficult.  As I said, they were expressed in Mr Pearson's e-mail to be given “on top of” the security provided under the original contract.  These emails and this agreement in the emails appears to place the "security" in the same class as cl 5(c).  However, curiously, if this be right, in the variation, cl 5(c) and appendix 1 to the subcontract were not varied.

4. The question as to whether, until practical completion, the first bond and the balance of the bonds is or are properly understood as governed only by cl 5(c) and not by cl 10.3 is a fine one.  I think there are arguments both ways.  I am inclined to the view that without amending cl 5(c) and appendix 1, notwithstanding the general intention to have back to back security and given the form of the general conditions of contract, the $150,000 bond should be seen as a substitute for cash and treated as moneys for the purposes of cl 5(c).

5. I am also inclined to the view that until practical completion, the balance of the bonds should be treated as security provided under a collateral contract and anticipated to be governed by the form of the general conditions of contract, that is, including cl 10.3.

6. I interpolate at this point that this of course is an interlocutory hearing.  However, like interlocutory hearings in some other contexts, this interlocutory hearing in practical business terms is near to a final hearing.  If on a matter of this kind I restrain the calling up of the bonds on an interlocutory basis then, subject to circumstances changing, the parties will be left to their rights as existing and the respondent will have to wait perhaps until it demonstrates its claim in an arbitral or curial context.  This may not be the case because events may move forward in relation to termination, however, I think that comment is important to be made because in a case where the construing of a contract is central and where the grant or the non grant of the injunction amounts, to a degree, to final relief I think it incumbent upon me not to shirk from giving effect to my inclinations as to the proper construction of the agreement, bearing in mind, at all times however, the important role of the balance of convenience in that context as well.

7. Another reason why, though an interlocutory application, this matter can be looked upon in part as requiring careful examination of the contractual arguments is that the substantive suit in this Court is not one for the resolution of the building case, rather there is a claim for misleading and deceptive conduct and damages.  The claim for the return of the bonds is as I have said at least in relation to the second to fourth bonds on the evidence before me at the moment somewhat weak, to put it generously.  In those circumstances there is a degree of detachment of the interlocutory relief from the primary allegations for resolution in this Court.  In those circumstances I think it more appropriate to deal with the matter with so close attendance to the contractual rights as the interlocutory nature of the matter and the balance of convenience allow.

8. I have been assisted in this regard by the helpful submissions of counsel no doubt into which there has been valuable input by their respective solicitors.

9. If cl 10.3 applies to any security, that is to any of the bonds, its meaning must still be extracted.  It must be read in the light of the contract as a whole, including the rights of the parties expressed in the first subcontract.  Clause 15 is not unimportant.  It anticipates deductions from monies owing and retention monies.  The ability of the builder, that is the respondent, to do this will not generally be interfered with by injunctive relief.   It may do so wrongfully but that will generally be sorted out by the parties in some venue for the building dispute.  If cl 10.3 does apply to the retention fund guarantee, that is to the sums of money put up under cl 5(c), whether the $150,000 or the balance of the bonds if they are to be viewed as put up under cl 5(c), it should be read in the light of cl 15 which gives the respondent rights against retention monies, and it would be odd if cl 10.3 in those circumstances deprived the respondent of rights against the retention fund which were apparently given by cl 15.  This oddity was remarked upon by Brooking JA in Bachmann's case, supra at 436-7.  Also to be borne in mind is the judgment of the New South Wales Court of Appeal in Malaysia Hotel (Australia) Pty Ltd v Sabemo Pty Ltd (1993) 11 BCL 50 where Sheller JA, with whom Kirby P and Mahoney JA agreed, drew the distinction between transforming security into another form and drawing it down beneficially.  This should be borne in mind in particular, if properly understood, a guarantee has been given in lieu of a retention fund. 

10. The applicant here does not draw any distinction between these two purposes of drawdown.  It seeks to restrain any drawdown, that is, whether it be for transformation or for beneficial use.  I should add that on any view of the matter at this point the drawing down of any security can only be for substitution for retention funds or otherwise to hold as security for the due and faithful performance of the contract.  I should add also that there appears to be no provision in the contract, that is the subcontract, for the separate identification and placement of monies drawn down and no alternative relief is sought in relation thereto. 

11. At the risk of repetition it is important to note that a relevant and powerful consideration in the construction of cl 10.3 and one which was of significance and importance to Brooking JA in Bachmann's case, is the unconditional form of the bonds themselves.  How then should clause 10.3 be construed?  The applicant says that on the material to which I will come it cannot be concluded that there is a breach and so cannot be concluded that the circumstances have arrived entitling draw down.

12. With some exceptions, to which I will come, the evidence before me does not prove to the point of demonstration that there has been a breach.  But cl 10.3 should not be read such that the builder respondent can only call upon the bond when it can prove at an interlocutory level that there is a breach.  Clause 10.3 says that the company is entitled to draw on the guarantee upon breach of the contract and where the breach is not remedied.  While it may be difficult, if not impossible, to prove in the haste of an interlocutory hearing one way or the other to the point of demonstration that there has or has not been a breach, the evidence does show assertions of a significant kind to that effect made by the respondent.

13. The applicant has sought to answer these assertions by assertions of its own.  I think it is fair to say, though bearing in mind and giving due allowance for the time involved, that the applicant has not shown a strong case to the effect that there is no breach.  What it has shown is that there is an acceptable case, if the parties who deposed are to be accepted, that there is an asserted dispute.  I am prepared to accept that the respondent in due course will have to fight for its assertions that the applicant is in breach. 

14. Clause 10.3 does not say that the respondent is entitled to call only upon proof of breach or only upon finding of breach.  It says upon breach and upon the breach not being remedied.

15. At this point there is an inter-relationship between questions of construction and questions of balance of convenience.  Related both to the question of construction, that is that cl 10.3 is not limited to proof of breach or to demonstrated breach, but to breach unremedied, as a fact or juridical act or state of affairs, and also related to the balance of convenience is the question of the contractual allocation of risk as to who should be out-of-pocket in funding the result of disputed building claims. 

16. If I may say so respectfully, the powerful judgments of Charles and Callaway JJA in Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812 and Brooking JA in Bachmann v BHP Power, supra, as well as the considerations evident in the judgments of Barwick CJ, Gibbs, Stephen, Mason and Murphy JJ in Woodhall v The Pipeline Authority, supra, are powerful matters in understanding the construction of these clauses as well as assessing the balance of convenience.

17. Those judges and justices were not identifying independent jurisprudential policy questions independent of the construction of contracts.  They were indicating the underlying evident commercial purpose in the provision of clean bonds and their place in contracts of this kind.  That they are not lightly to be interfered with in their ordinary operation and that provisions which may be seen to be limitations on their calling should be understood and construed, and their effect in the context of the balance of convenience would be understood, by reference to the purpose of the bonds: that is providing something akin to money as security for performance.

18. I am prepared to work on the basis of the proposition that if cl 10.3 applies, it contains not only positive obligations, but an implied negative obligation that the company, that is the respondent, is entitled and only entitled to draw on the bank guarantee in the circumstances identified.  However, that does not mean that any call will be prevented unless it can be proved, to the point of demonstration, that there is an unremedied breach.  Indeed, may I add at this point in terms of construction, the fact that there is a thirty day period after written notice identified tends to indicate that the clause is not intended to limit the call on a bond merely because there has not been the resolution of a dispute.

19. Relevant to any restraint by the Court, employing cl 10.3, are the following:  First, the strength of the case put forward that there is no breach, and whether that case is framed in assertion and counter assertion, or whether the evidence goes more powerfully to the underlying material.  It is not a case of the respondent justifying its call.  It has a right under the bond.  If it is to be restrained, there has to be, in my view, some case made at an interlocutory level, for the restraint, and so the relevant case to understand is the relative strength of the case put forward that there is no breach.  Of course, due allowance is to be made for the time available in all the circumstances.

20. Secondly, there should be a recognition in the balance of convenience that the parties in the building industry have given unconditional bonds. 

21. Thirdly, there should be a recognition that the bond is given to be called though, of course, in accordance with any contractual limits inter se. 

22. Fourthly, importantly, there should be an assessment on the evidence of what prejudice attends the call.  What is the prejudice here?  One looks, in these cases, at the status quo.  But what is the status quo?  The status quo includes a right to call a bond, untramelled on its face between the beneficiary and the obligor, in the context of arguably, at least, in relation to some of the bonds, there needing to be a breach unremedied after written notice.  The applicant is in administration.  It appears on the evidence that that administration has been brought about by financial stringency.  It is said, in submission, that the behaviour of the respondent in withholding monies and in failing to give extensions of time under the contract, has caused this state of affairs.  There is no satisfactory evidence to that effect.  It is said that the call will impede any scheme amongst creditors or reconstruction of the company.  I disallowed opinion evidence of the administrator to that effect.  It appeared to me to be a bald assertion better able to be proved by primary evidence.  Mr Hemsworth, his wife and son and another company, which I infer is controlled by his family or him, are the principals of the applicant.  The fact is that if these bonds are called, those three people and that company, as well as the applicant, will be made the subject of a call by the bondsman and $800,000 will be asked for from their assets and from the applicant's assets.

23. There is no evidence before me of the assets of the applicant.  It may be, as far as I am aware, asset rich and cash poor.  Its difficulties may be current rather than capital.  Its difficulties may be liquidity rather than an asset base.  Nor have I any evidence from Mr Hemsworth, his wife or son or the fourth shareholder as to their financial capacity and worth.

24. It is unquestioned that should American Re-Insurance Company call for $800,000 from them, they will have $800,000 less in total in their assets to deal with in relation to any possible reconstruction.  However, I have no evidence before me about what that means in terms of their overall assets, their intentions or desires and the level of other creditors who may be involved.

25. If the bonds are called, the respondent will have those funds available as security to be accounted for pending any resolution of the dispute.  I am unpersuaded that that will cause any significant damage of an irreparable nature to the applicant or to its creditors.  To restrain the respondent calling on the bonds would deny to the respondent what may well be, and it has not been shown past the point of assertion not to be, an exercise of its contractual rights.

26. There is no suggestion that the respondent is in financial need of the funds to stay solvent or otherwise financially stable.  However, given that the applicant is now in administration, there is a degree of uncertainty, it seems to me, about how the respondent will be dealt with in the future should it simply remain, as it currently is according to its assertions, a substantial creditor of the applicant.  It bargained for the right to have given to it unconditional bonds.  If it is wrongfully calling on them and if it is obliged in due course to recognise that its contractual rights are not as it identifies presently, it will be obliged to repay those sums.  There is no suggestion in submissions or in the evidence that the respondent is financially in a state to make that question doubtful.

27. Importantly, there is no evidence of a kind so powerful in leading to the result in Pearson Bridge (NSW) Pty Ltd v State Rail Authority of NSW [1982] 1 Aust Const LR 81 (Yeldham J 28/6/1982). This is not a call upon an otherwise unimpeachable company whose reputation would be irreparably damaged by having a call on a performance bond. No such case was put to me. No such evidence was led. I repeat, the applicant is in financial administration under Part 5.3A of the Corporations Act.

28. That type of evidence could be, in any given case, very powerful where there is the slightest doubt that the performance bond is being called other than rightfully.  The consequences of its call might be catastrophic to the business reputation of a company that has never had a call made on it and whose position would be irreparably damaged or harmed.  However, no such case is made here, and I am unpersuaded on the evidence that there is any irreparable harm to the applicant. 

29. The status quo, as I have said, includes the right to call.  The status quo also includes the $150,000 bond being given as the equivalent of cash as a retention fund.  Even if cl 10.3 affects cl 5(c), cl 10.3 in that context should, it seems to me, be read according to and with the effect of the clear purpose of cl 5(c) to provide the bond as a cash substitute.  In those circumstances, even if cl 10.3 applies to the first bond, the balance of convenience it seems to me is even stronger in relation to that bond, than the other three.

30. Also relevant to the balance of convenience is the strong case made by the respondent in respect of non monetary breaches.  I have earlier set out cl 12 of the subcontract preliminaries.  Mr Alan Mark Rowell in an affidavit of 19 September 2002 set out evidence of various alleged breaches of the contract by the applicant which, it was said, remained unremedied for thirty days after notice for the purposes of cl 10.3.  It is only necessary to refer to one, that is to the insurance question. 

31. Before turning to that evidence, I should deal with one submission of the applicant about it.  Mr Cohen, counsel for the applicant, said that the alleged uncontroverted matter in Mr Rowell's evidence should be read in the light of the late provision of the affidavit and the non-provision, until the hearing in court, of the substantiating material.  However, the substance of the evidence in Mr Rowell's affidavit dealt with what was contained in the formal breach notice given to the applicant by the respondent on Monday, 16 September 2002.  Within that notice of breach there were the allegations of failure to meet the provisions in relation to insurance, to which I am about to refer.  There could have been no doubt in the applicant's mind that the purpose of the notice on the Monday was to set up contractual circumstances entitling the respondent to terminate the contract.  That as yet has not happened or, alternatively, it has not been identified before me as a consideration that I should be dealing with (that is whether or not there has been a valid termination).  However, it makes plain that it was of the utmost importance to the applicant to deal with matters dealt with in the notice of breach especially in the light of cl 10.3 if that were to be relied upon before me to restrain the calling up of the bonds.

32. Therefore, though I am not being critical of Mr Cohen's submission, I think I should approach Mr Rowell's affidavit more realistically and, though recognising that it came late, also recognise that there has been no attempt (even today to re-open) to challenge the factual matters dealing with the insurance question to which I now turn. 

33. It is necessary to go back to P12.07 of the subcontract preliminaries.  As can be seen from its form, it has three paragraphs.  The first identifies a clear contractual obligation:  The applicant must provide to the respondent, on or before entering the subcontract and at any other time on request, evidence that all insurances required to be effected and maintained have been effected and are current.  The second and third paragraphs deal with a self-help remedy of the respondent to deduct monies due to the applicant to pay for insurance if that is thought appropriate.  However, it is the plain obligation of the applicant to provide this information when asked for.  The contractual purpose of it is too obvious to need elucidation.  A failure to do what is required by the first paragraph not only would lead the respondent, reasonably, to fear the uninsured status of equipment but, in the commonsense world of business, might say something about either the ability of this subcontractor to pay for insurance or the willingness of insurers to give it insurance.  In either case these are important, though non-monetary, matters.  Mr Rowell gave evidence in pars 14 to 19 of his affidavit substantially to the following effect: that a letter was sent on 4 March 2002 requesting a copy of updated certificates.  This request was repeated on 22 June 2002 noting, as the letter did, that no response had been received to the earlier correspondence.

1. An answer was given on 26 June 2002 to the letter of 22 June 2002 which merely referred to the subject matter of insurance and gave no substantive answer.  On 9 July 2002 a further letter was sent which squarely put, amongst other things, to the applicant that the correspondence of 4 March 2002 and 21 June [sic] (in fact 22 June) wherein the respondent had requested the applicant to provide evidence of insurance as required by the contract had not been answered.  The word "breach" was not used.  However, I do not think that affected circumstances such that it could not be said that there had been written notice of the breach given to the contractor for the purposes of cl 10.3. 

2. Thirty days have well and truly passed since 9 July 2002.  Mr Pearson says that the same notification was again given to the applicant in August and September.  Those letters are also included in the evidence.  They likewise put to the applicant that it had failed to comply with the request which in terms is in fact a breach.  Thus, there is very strong evidence, if not evidence to a point of demonstration, that there has been a breach of the contract by the subcontractor and such breach has not been remedied for thirty days after written notice of the breach.  It should be recalled that in those circumstances the first line of cl 10.3 says that the company is entitled to draw on the bank guarantee for any reason whatsoever.

3. No suggestion is made before me that the call is in bad faith or is fraudulent.  I should add that there is not a skerrick of evidence to that effect.  Therefore, relevant to the exercise of the balance of convenience factors that I have identified, and even assuming in the applicant's favour that cl 10.3 governs the totality of the bonds given, there is a real and powerful case made for the satisfaction of cl 10.3. 

4. In my view, it is not inappropriate, after the argument that has taken place, to examine the contractual interpretation and take into account my views as to the strengths of the construction interpretation arguments.  In summary, I think there is a powerful argument, and the better view is, that the $150,000 bond is regulated by either cl 5(c) alone, or if cl 10.3 also regulates it, it is to be read in the light of the position of the bond as a substitute for money in a retention fund.  Thus, in my view, the better view is that the $150,000 bond should be examined as something given expressly as good as money for the purpose of a retention fund.  And the better view is, in my view, that as a matter of contract the $150,000 bond can be called.

5. It is more strongly arguable that cl 10.3 applies to the balance of the bonds.  However, even so, my view of the better view of the proper construction of cl 10.3, in the light of the unqualified nature of the bonds and the intended risk allegation in a building contract of this kind, is that it is not to be construed as limited to where a company in the position of the respondent can provide demonstrated proof of breach.  But it is up to the applicant to put a case that there is no breach.  What has occurred here is at best assertion. 

6. In those circumstances, and in the light of the balance of convenience evidence which I have identified, I would not in those circumstances, even without the evidence of the insurance question, restrain the calling of the balance of the bonds.  However, in the light of what I perceive to be a strong case made as to the non-monetary breach of the insurance obligations, that makes the case even more powerful for not restraining the calling of the bonds. 

7. As I have said earlier, important in the assessment of the balance of convenience is the absence of any reputation evidence, the absence of any evidence of the worth of those behind the company, and the absence of any real evidence as to the detrimental effect the calling of the bonds will have on the prospects of a successful reconstruction of the company if that is what is required to make it continue operation.

8. In that light, the uncertainty of the respondent's position with a possible reconstruction or scheme put forward by an administrator is such that, in my view, the balance of convenience weighs in allowing the bonds to be called.  This I do not see, as I have said, as a change in the status quo.  I think it is properly understood as entitling the status quo to be maintained by the exercise by one party of its contractual rights, leaving the parties to a proper forum to identify whether or not monetary relief should flow from that exercise.

9. I should say that I have been greatly assisted by submissions of counsel.  I have not, because of time, set out all the respective submissions counsel were good enough to supply.  The written submissions supplied which will remain with the file.  I have also not referred to the large number of cases on the topic.  It should not be assumed that I have not had recourse to them.  In coming to my view, I have taken account of, not only the cases to which I have referred but also, in particular, Australian Conference Association Ltd v Mainline Constructions Pty Ltd (in liq) (1978) 141 CLR 335, Anaconda Operations Pty Ltd v Fluor Daniel Pty Ltd [1999] VSCA 214, Reed Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd (1999) 15 BCL 158, Bateman Project Engineering Pty Ltd v Resolute Ltd (2002) 18 BCL 41, ADI Ltd v State Electricity Commission (1997) 13 BCL 337, Olex Focas Pty Ltd v Skodaexport Co Limited (17 September 1996, unreported, Victorian Court of Appeal, 7050 of 1996), Barclay Mowlem Construction Ltd v Simon Engineering (Australia) Pty Ltd (1991) 23 NSWLR 451 and Hughes Bros Ltd v Telede Pty Ltd (1989) 7 BCL 210, Jack on Documentary Credits, 3rd edition, in particular pages 356 and following, Dolan, The Law of Letters of Credit and Commercial Stand-by Credits,and the article by Debattista on performance bonds and letters of credit in [1997] Journal of Business Law 289.  Ultimately, as Owen J said in Bateman's case, supra, it is a question of the particular statutory construction of a contract and the placement of that contract in its commercial context and the particular balance of convenience of the parties in question.

10. It can be said that there are two lines of authority discernible concerning the restraint of calling of bonds such as these.  Those two lines can be summarised as the cases from and applying Pearson Bridge, supra, where a contractual limitation was found and enforced, and in contradistinction, the cases, in particular in the Victorian Court of Appeal, Malaysia Hotels v Sabemo, supra, and Woodhall, supra, which give, I think, if I may say so with respect, significantly more emphasis in both construing the contract and in the balance of convenience to the commercial place of instruments such as these and to the recognition of their part in the commercial and contractual fabric of the arrangements between the parties.

11. In particular, there is a reference in some of the judgments to notions of risk allocation, and I have already referred to this earlier.  It would be unfortunate if that is identified as a separate free standing jurisprudential concept detached from the process of contractual interpretation and the balance of convenience, in particular the former.  I have not intended any use of that phrase to indicate other than one of the necessary elements in understanding what the business people were doing in a contract of this nature when an unconditional bond is given.

12. Further and finally, it is important to understand that this is not a case where, on the evidence before me, irreparable damage has been shown to be likely to the applicant.  In cases where there is proof of such irreparable damage, for instance to reputation or otherwise, then the weighing of the pros and cons of the contractual provisions will be part of an entirely different balance of convenience context.

13. I will dismiss the notice of motion today.  I will take it that there is a contractual agreement between the parties that no call will be made on the bondsman prior to noon on Monday 23 September 2002.  If an extension is needed after that, then the parties will need to come up and interrupt my migration case on Monday in the morning and seek an extension.  There is no need to have an affidavit.  If the parties cannot reach an arrangement, then they may just tell me what the position is.

14. The applicant is to pay the respondent’s costs of the motion.

I certify that the preceding ninety-eight (98) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Allsop.

Associate:

Dated:            23 September 2002

Counsel for the Applicant:	M J Cohen
Solicitor for the Applicant:	Watson Mangioni
Counsel for the Respondent:	R W Hunt
Solicitor for the Respondent:	Corrs Chambers Westgarth
Date of Hearing:	20 September 2002
Date of Judgment:	20 September 2002