Bateman Project Engineering Pty Ltd v Resolute Ltd

[2000] WASC 284

BATEMAN PROJECT ENGINEERING PTY LTD & ORS -v- RESOLUTE LTD & ORS [2000] WASC 284

Reported Decision:	(2000) 23 WAR 493
Jurisdiction:	SUPREME COURT OF WESTERN AUSTRALIA	Citation No:	[2000] WASC 284
Case No:	CIV:1734/2000	Heard:	25 JULY 2000
Coram:	OWEN J	Delivered:	24/11/00
No of pages:	32	Judgment Part:	1 of 1
Result:	Application dismissed
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Parties:	BATEMAN PROJECT ENGINEERING PTY LTD (ACN 056 741 596) KINHILL PACIFIC PTY LTD (ACN 010 241 620) KILBORN ENGINEERING PACIFIC PTY LTD (ACN 00 864 353) RESOLUTE LTD (ACN 009 069 914) BULONG OPERATIONS PYT LTD (ACN 008 930 881) BULONG NICKEL PTY LTD (ACN 000 807 036) PRESTON NICKEL HOLDINGS PTY LTD (ACN 083 334 936) PRESTON RESOURCES LTD (ACN 003 207 467)
Catchwords:	Contracts Building, Engineering and Related Contracts Other Matters Unconditional undertaking to pay (Bank guarantee) Dispute as to underlying contract Whether beneficiary entitled to draw on security Proper interpretation of the contract
Legislation:	Nil
Case References:	ADI Ltd v State Electricity Commission of Victoria (1997) 13 BCL 337 Anaconda Operations Pty Ltd v Fluor Daniel Pty Ltd (1999) 16 BCL 230 Anderson v G H Mitchell & Sons (1941) 65 CLR 543 Bachmann Pty Ltd v BHP Power New Zealand Ltd [1999] 1 VR 420 Barclay Mowlem Construction Ltd v Simon Engineering (Australia) Pty Ltd (1991) 23 NSWLR 451 Baulderstone Hornibrook Engineering Pty Ltd v Kayah Holdings Pty Ltd (1998) 14 BCL 277 Bond v Larobi Pty Ltd (1992) 6 WAR 489 Cargill International SA v Bangladesh Sugar and Food Industries Corporation [1998] 1 WLR 461 Coby Constructions Pty Ltd v Melbourne Glass Pty Ltd, unreported; SCt of Vic; (Gillard J); Library No 8322; 7 April 1998 Dobbs v National Bank of Australasia Ltd (1935) 53 CLR 643 FFE Minerals Australia Pty Ltd v Vanadium Australia Pty Ltd [2000] WASC 1 Fletcher Constructions Australia Ltd v Varnsdorf [1998] 3 VR 812 Hughes Bros Pty Ltd v Telede Pty Ltd (1989) 7 BCL 210 Hurst v Vestcorp Ltd (1988) 12 NSWLR 394 J H Evans (NT) Pty Ltd v Diano Nominees Pty Ltd [1989] NTSC 4 Mitsui Kensetsu Corporation Australia Pty Ltd v State of South Australia, unreported, SCQ, 9 August 1990 Novamaze Pty Ltd v Cut Price Deli Pty Ltd (1995) 128 ALR 540 Olex Focas Pty Ltd v Skodaexport Co Ltd (1996) 134 FLR 331 Pearson Bridge (NSW) Pty Ltd v State Rail Authority of New South Wales (1982) 1 Aust Const 81 Reed Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd (1998) 15 BCL 158 Selvas Pty Ltd v Hansen & Yuncken (SA) Pty Ltd & Anor (1987) 6 ACLR 36 Transfield Pty Ltd v Fuller-FL Smidth (Pacific) Pty Ltd, unreported; SCt of NSW; (Bainton J); 9 May 1997 Wood Hall Ltd v The Pipeline Authority (1979) 141 CLR 443 American Cyanamid Co v Ethicon Ltd [1975] AC 396 Castlemaine Tooheys Limited v South Australia (1986) 161 CLR 148 Czarnikow v Roth Schmidt & Co [1922] 2 KB 478 Scott v Avery [1856] 5 HLC 810 State Transport Authority v Apex Quarries Ltd [1988] VR 187

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

IN CHAMBERS

CITATION : BATEMAN PROJECT ENGINEERING PTY LTD & ORS -v- RESOLUTE LTD & ORS [2000] WASC 284 CORAM : OWEN J HEARD : 25 JULY 2000 DELIVERED : 24 NOVEMBER 2000 FILE NO/S : CIV 1734 of 2000 BETWEEN : BATEMAN PROJECT ENGINEERING PTY LTD (ACN 056 741 596)

First Plaintiff

KINHILL PACIFIC PTY LTD (ACN 010 241 620)
Second Plaintiff

KILBORN ENGINEERING PACIFIC PTY LTD (ACN 00 864 353)
Third Plaintiff

AND

RESOLUTE LTD (ACN 009 069 914)
First Defendant

BULONG OPERATIONS PYT LTD (ACN 008 930 881)
Second Defendant

BULONG NICKEL PTY LTD (ACN 000 807 036)
Third Defendant

PRESTON NICKEL HOLDINGS PTY LTD (ACN 083 334 936)
Fourth Defendant

(Page 2)

PRESTON RESOURCES LTD (ACN 003 207 467)
Fifth Defendant

Catchwords:

Contracts - Building, Engineering and Related Contracts - Other Matters - Unconditional undertaking to pay (Bank guarantee) - Dispute as to underlying contract - Whether beneficiary entitled to draw on security - Proper interpretation of the contract

Legislation:

Nil

Result:

Application dismissed

Representation:

Counsel:

First Plaintiff : Mr M W Odes QC & Mr G C Steinepreis
Second Plaintiff : Mr M W Odes QC & Mr G C Steinepreis
Third Plaintiff : Mr M W Odes QC & Mr G C Steinepreis
First Defendant : Mr D B Shaw
Second Defendant : Mr R H B Pringle QC & Mr B A Millar
Third Defendant : Mr R H B Pringle QC & Mr B A Millar
Fourth Defendant : Mr R H B Pringle QC & Mr B A Millar
Fifth Defendant : Mr R H B Pringle QC & Mr B A Millar

Solicitors:

First Plaintiff : Minter Ellison
Second Plaintiff : Minter Ellison
Third Plaintiff : Minter Ellison
First Defendant : Bennett & Co
Second Defendant : Hollingdales
Third Defendant : Hollingdales
Fourth Defendant : Hollingdales
Fifth Defendant : Hollingdales

(Page 3)

Case(s) referred to in judgment(s):

ADI Ltd v State Electricity Commission of Victoria (1997) 13 BCL 337
Anaconda Operations Pty Ltd v Fluor Daniel Pty Ltd (1999) 16 BCL 230
Anderson v G H Mitchell & Sons (1941) 65 CLR 543
Bachmann Pty Ltd v BHP Power New Zealand Ltd [1999] 1 VR 420
Barclay Mowlem Construction Ltd v Simon Engineering (Australia) Pty Ltd (1991) 23 NSWLR 451
Baulderstone Hornibrook Engineering Pty Ltd v Kayah Holdings Pty Ltd (1998) 14 BCL 277
Bond v Larobi Pty Ltd (1992) 6 WAR 489
Cargill International SA v Bangladesh Sugar and Food Industries Corporation [1998] 1 WLR 461
Coby Constructions Pty Ltd v Melbourne Glass Pty Ltd, unreported; SCt of Vic; (Gillard J); Library No 8322; 7 April 1998
Dobbs v National Bank of Australasia Ltd (1935) 53 CLR 643
FFE Minerals Australia Pty Ltd v Vanadium Australia Pty Ltd [2000] WASC 1
Fletcher Constructions Australia Ltd v Varnsdorf [1998] 3 VR 812
Hughes Bros Pty Ltd v Telede Pty Ltd (1989) 7 BCL 210
Hurst v Vestcorp Ltd (1988) 12 NSWLR 394
J H Evans (NT) Pty Ltd v Diano Nominees Pty Ltd [1989] NTSC 4
Mitsui Kensetsu Corporation Australia Pty Ltd v State of South Australia, unreported, SCQ, 9 August 1990
Novamaze Pty Ltd v Cut Price Deli Pty Ltd (1995) 128 ALR 540
Olex Focas Pty Ltd v Skodaexport Co Ltd (1996) 134 FLR 331
Pearson Bridge (NSW) Pty Ltd v State Rail Authority of New South Wales (1982) 1 Aust Const 81
Reed Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd (1998) 15 BCL 158
Selvas Pty Ltd v Hansen & Yuncken (SA) Pty Ltd & Anor (1987) 6 ACLR 36
Transfield Pty Ltd v Fuller-FL Smidth (Pacific) Pty Ltd, unreported; SCt of NSW; (Bainton J); 9 May 1997
Wood Hall Ltd v The Pipeline Authority (1979) 141 CLR 443

Case(s) also cited:

American Cyanamid Co v Ethicon Ltd [1975] AC 396
Castlemaine Tooheys Limited v South Australia (1986) 161 CLR 148


(Page 4)

Czarnikow v Roth Schmidt & Co [1922] 2 KB 478
Scott v Avery [1856] 5 HLC 810
State Transport Authority v Apex Quarries Ltd [1988] VR 187

(Page 5)

1 OWEN J: This is an application for an interlocutory injunction to prevent the defendants from calling for moneys payable under an unconditional promise to pay given by a Bank. The unconditional promise to pay was given by the Bank effectively as security for the obligations of the plaintiffs in relation to a contract entered into between the plaintiffs and the defendants.

Background

2 From about 1996 the first defendant ("Resolute"), the second defendant (originally called Energy Oil and Gas NL ("EOG") but which later changed its name and status) ("Bulop") and the third defendant ("Bulnick") began to develop a laterite nickel and cobalt mine approximately 30 kms east of Kalgoorlie. It appears that Bulop owns all of the issued share capital of Bulnick. In October 1998 the fifth defendant, which is a subsidiary of the fourth defendant, acquired all of the issued share capital of Bulop.

3 The plaintiffs are engineering service contractors operating under the name "The Bateman Kinhill Kilborn Joint Venture". On 7 February 1997 the plaintiffs on the one hand and Resolute, Bulnick and EOG on the other entered into a written agreement No BNP-MC-001 for the design, engineering and construction management of a process plant (the "Process Plant") at the Bulong mine. The initial contract was amended by a supplementary deed dated 20 February 1998 (the "Supplementary Deed") and further amended by a letter from Resolute to the plaintiffs dated 20 March 1998. I will refer to the 7 February 1997 written agreement (as amended) as "the Contract".

4 In October 1998 Resolute assigned, or purported to assign, its interest in the Bulong Nickel project to Bulop and Bulnick. Issues have arisen as to whether the consent of the plaintiffs to the assignment was necessary and, if it was, whether it was given or whether the plaintiffs are now able to assert that consent was not obtained. I do not think I have to resolve those issues for the purposes of deciding the questions that I have before me. For the sake of convenience I will refer to contracting parties (other than the plaintiffs) simply as "the defendants".

5 Under the Contract, the plaintiffs agreed separately to act together as joint venturers to design, engineer, construct, commission and hand over the Process Plant, associated facilities and infrastructure to extract nickel and cobalt from the ore to be mined at Bulong. The "Target Capital Cost" of the project (which is a defined term) was initially estimated to be about

(Page 6)

$165,000,000, subject to adjustments. The plaintiffs' remuneration under the Contract was essentially on a cost-reimbursable basis. It was initially estimated or "targeted" to be $22,000,000. Under the 7 February 1997 agreement, practical completion was to be achieved by 30 June 1998, and the Process Plant was to meet certain stipulated performance requirements to be measured by a series of performance tests which were to be completed within 18 months of practical completion. The Contract provided for penalties to be paid by the plaintiffs, should practical completion or the performance tests not be achieved by the respective dates. The Contract also provided for the parties to share the risk or rewards of overruns or underruns should the project capital cost deviate from the estimates.

6 The Supplementary Deed and the 20 March 1998 letter made amendments to the 7 February 1997 agreement. Among other things, the Target Capital Cost was effectively altered to a "Definitive Cost Estimate" of about $208,000,000 and the plaintiffs' remuneration was altered to a fixed sum of $26,400,000. There were also changes to the respective obligations in relation to cost overruns.

7 The Contract required the plaintiffs to provide securities for the performance of their obligations. It is these securities that are at the heart of this dispute and I will come back to describe those contractual requirements in some detail a little later.

8 The plaintiffs say that practical completion was achieved on 12 December 1998. They have claimed an extension of time under the Contract from the due date of 27 August 1998 to beyond the actual date of practical completion. The defendants have rejected this claim. The plaintiffs have also made a concurrent claim for variations, damages and further contractual entitlements. The defendants have also rejected these claims. The plaintiffs have given notice of intention to litigate the claims, as they are required to do under the Contract.

9 In February 1998 the defendants wrote to the plaintiffs claiming payment of $1,200,000. The plaintiffs rejected the claim. In March 1999 the plaintiffs gave notice to the defendants that they would be seeking from the defendants somewhere in the vicinity of $10,000,000 in cash and bonus shares. On 11 May 2000 the defendants wrote to the plaintiffs saying that, on the basis of the Definitive Cost Estimate, there had been overruns of at least $1,200,000. They made a formal demand for payment of that sum. On 16 May 2000 the plaintiffs replied. They rejected the defendants' claim on the basis that the Definitive Cost Estimate was

(Page 7)

wrong (it not having taken into account all variations) and, in any event, the claim could not be made until final completion had been achieved (which had not then happened). On 2 June 2000 the plaintiffs wrote a further letter in which they asserted that instead of there being overruns, there were underruns totalling $5,700,000. They gave notice of a total claim against the defendants of around $10,000,000.

10 On 15 June 2000 the defendants wrote to the plaintiffs enclosing a calculation of the "Target Capital Cost Overrun" of $24,164,043. Under cl 1.5.3 of Appendix D of the Contract (as altered by the Supplementary Deed), the plaintiffs are obliged to meet the first $1,200,000 of overruns. If the overruns exceed $15,000,000, the plaintiffs are obliged to meet all costs but with a maximum commitment of $5,000,000. In the 15 June 2000 letter the defendants claimed payment of that sum and also gave notice that, unless the amount was paid within 14 days, they would call on the security. On 23 June 2000 the plaintiffs responded saying that the assessment of the Target Capital Cost (and hence the overruns) was wrong and denying that they were indebted to the defendants in the amount of $5,000,000.

11 Further discussions failed to resolve the dispute and these proceedings were commenced.

The Contractual Obligation to Provide Security

12 Clause 6 of the Contact is, relevantly, in these terms:

6. SECURITY AND PERFORMANCE UNDERTAKINGS

6.1 Purpose

Security, retention monies and performance undertakings are for the purpose of ensuring the due and proper performance of the Contract.

6.2 Provision of Security

The [plaintiffs] will … provide two securities to the [defendants] in a form acceptable to the [defendants] as follows


(a) A security for an amount of $2,000,000 in order to secure [certain of the plaintiffs' obligations];

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(b) A security for an amount of $5,000,000 in order to secure the [plaintiffs'] obligations with regards to overruns of the Target Capital Cost pursuant to Clause 1.5.3 of Appendix D of the Contract;

In the event that the Target Capital Cost has been overrun … :

(i) The [defendants] will notify the [plaintiffs] in writing the amount of the [plaintiffs'] liability.

(ii) The [plaintiffs] shall have 14 days after receipt of notification to resolve the claim to the [defendants'] satisfaction.

(iii) Failing resolution by the [plaintiffs] [within] the 14-day period, the [defendants] shall be entitled to proceed with the conversion of the security for the amount claimed and the [plaintiffs] shall not hinder, obstruct, restrain or injunct the Principal from so doing and the [plaintiffs] will not exercise [their] rights under Clause 32 prior to the [defendants] drawing down the securities. The [defendants] shall not be liable for any loss occasioned by conversion pursuant to the Contract.

6.3 Form of Security

The security shall be in the form of cash or an approved unconditional irrevocable undertaking given by an approved financial institution or insurance company, or other form approved by the party having the benefit of the security. The costs (including stamp duty or other taxes) of and incidental to the provision of the security shall be borne by the party providing the security.

The party having the benefit of the security shall have a discretion to approve or disapprove of the form of an unconditional undertaking and the financial institution or insurance company giving it or other form of security

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offered. The form of unconditional undertaking attached to this contract in Schedule A is approved.

…

6.5 Conversion of Security

If the [defendants] become entitled to exercise any right under the Contract in respect of the security ("Form of Security, Schedule A") the [defendants] may, in accordance with Clause 6.2, convert the whole or part of the security into money and draw down such money."

13 There is a reference in cl 6.2(iii) to cl 32 of the Contract. Clause 32 is entitled "Dispute Settlement". It deals with the arbitration of disputes but envisages, in cl 32.7, that a party may go straight to litigation (after giving a 14-day notice) rather than engaging in forms of alternative dispute resolution.

14 It is to be noted that cl 6 specifies that the security may be in cash or it may take the form of an unconditional undertaking to pay. The defendants reserved the right to approve or disapprove the form of the security and the identity of the financial institution providing it. The plaintiffs provided the two securities. I am not here concerned with the security referred to in cl 6.2(a). The relevant security is the one provided pursuant to cl 6.2(b). It is, in all material respects, in the form set out in Schedule A to the Contract. Quite obviously, the defendants approved both the form of the Guarantee and the identity of the Bank as the guaranteeing institution.

15 The Guarantee was provided by way of a telex message from Societe Generale (Canada) ("the Bank") to Societe Generale (Sydney Office) dated 8 May 1997. In the preamble of the telex message the Bank says: "Please advise the [defendants] that [the Bank has] issued in their favour our irrevocable letter of guarantee (undertaking) reference No 41004 …". Although the undertaking of the Bank is, strictly speaking, an unconditional promise to pay rather than a guarantee, I will refer to it as "the Guarantee". The text of the Guarantee is as follows:

"At the request of the [plaintiffs] and in consideration of the [defendants] accepting this undertaking in respect of cl 6.2(b) of the Contract No BNP-MC-001, we, the [Bank], unconditionally undertake to pay on demand any sum or sums which may from time to time be demanded by the [defendants] to a maximum

(Page 10)

aggregate sum of A$5,000,000. The undertaking is to continue until notification has been received from the [defendants] that the sum is no longer required by the [defendants] or until this undertaking is returned to the [Bank] or until payment to the [defendants] by the [Bank] of the whole of the sum or such part as the [defendants] may require, or until presentation to the [Bank] of a release for final completion. But in any case not later than 30 June 2000 ["the expiry date"]. Should the [Bank] be notified in writing by the presentation of a written demand purporting to be given by an authorised representative of the [defendants] and stating;

(A) that the [plaintiffs are] in breach of [their] obligations under the Contract and

(B) the respect in which the [plaintiffs are] in breach and

(C) the amount claimed.

It is unconditionally agreed that the [Bank] will make the payment or payments to the [defendants] forthwith without reference to the [plaintiffs] and notwithstanding any notice given by the [plaintiffs] not to pay the same.

In the event the [defendants] make demand upon the [Bank] under the undertaking the [defendants] shall provide to the [Bank] together with the demand a copy of the notice given to the [plaintiffs] pursuant to cl 6.2(i) of the Contract … .

Upon the expiry date this undertaking will become null and void, whether returned to the [Bank] for cancellation or not and any demand of claim received after the expiry date shall be ineffective and not accepted.

This undertaking is personal to [the defendants] and is not transferable or assignable.

This undertaking is subject to the Uniform Rules for Contract Guarantees of the International Chamber of Commerce Publication No 458 except:

(A) the governing law shall be the law of Western Australia and

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(B) any dispute between the [defendants] and the [Bank] shall be settled exclusively by the Court of the State of Western Australia."

16 By arrangement between the parties, the expiry date was extended until 30 November 2000 and the defendants gave an undertaking not to call on the Guarantee before delivery of this decision.

17 In their letter of 15 June 2000 to the plaintiffs, the defendants said:

"Notice of Claim

In accordance with cl 1.5.3 of Appendix D of the Contract [the plaintiffs are] indebted to the [defendants] in the amount of $5,000,000. The [defendants claim] payment of that amount from [the plaintiffs].

In accordance with cl 6.2(ii) of the Contract the [defendants require] [the plaintiffs] to resolve the claim to the [defendants] satisfaction within 14 days.

Further Notice

Take notice that failing resolution by [the plaintiffs] within the 14-day period, the [defendants] shall be entitled to proceed with conversion of the security (referred to under cl 6.2(b) of the Contract) for the amount claimed."

18 As I have already said, the letter was accompanied by one-page schedule detailing how the Target Capital Cost Overrun of $24,164,043 was arrived at. On the same day (or on the following day) the defendants sent to the plaintiffs a three-page letter giving further detail of the matters in dispute and including two lever-arch files of supporting documents. In their response of 23 June 2000, the plaintiffs complained about being given only 14 days to review and analyse the documents. That matter aside, I did not understand the plaintiffs to argue that the letter of 15 June 2000 was defective in form. The real argument is one of substance, not form: are the defendants entitled, as a matter of contract, to demand payment under the Guarantee?

The Points in Issue

19 Counsel for the plaintiffs summarised the case that he wished to argue in three points. First, whether cl 6.2(b)(iii) is a provision which

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ousts the jurisdiction of the Court and is therefore invalid and unenforceable. If the answer to that question is in the negative, a question would still arise as to the proper construction of cl 6 in its entirety. This (in essence) is the third issue. If the answer to the first question is in the affirmative, then similar questions of construction will arise. The second issue, therefore, is whether the defendants' claim for overruns is premature. The third issue is whether, in the circumstances of this case, it is open to the Court to enjoin the defendants from taking steps to demand and receive moneys under the Guarantee.

Ouster of Jurisdiction

20 The essence of the plaintiffs' argument on the first issue is that the effect of cl 6.2(b)(iii) is permanently to deny the right to seek an injunction because once the Guarantee has been drawn down there would be nothing left to enjoin. Accordingly, the plaintiffs argue, the clause is an ouster of the jurisdiction of the courts and is void as being against public policy.

21 There was no real dispute about the legal principles governing this area. However, it will do no harm to re-state them by referring to the summary given by Drummond J in Novamaze Pty Ltd v Cut Price Deli Pty Ltd (1995) 128 ALR 540 at 548 - 49:

"It is well settled that a contract is against public policy and therefore void and unenforceable, to the extent that it operates as an ouster of the jurisdiction of the court to enforce the rights of a party under the contract or otherwise. In Dobbs v National Bank of Australasia Limited (1935) 53 CLR 643, Rich, Dixon, Evatt and McTiernan JJ said at 652-653:

'What no contract can do is to take from a party to whom a right actually accrues, whether ex contractu or otherwise, his power of invoking the jurisdiction of the Courts to enforce it.'

Scott v Avery (1856) 5 HLC 810 established that a contractual term that made the obtaining of an arbitral award a condition precedent to the accruing of a right of action on a contract did not infringe this public policy, for the reason that there existed no cause of action whose prosecution could be interfered with by the contractual agreement until an award had first been

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made. The reason for the existence of this head of policy appears from the various judgments. Baron Martin at 830 said:

'The true ground I believe to be, that a prospective agreement not to have recourse to the courts of law or equity of the country in respect of future causes of action to arise, is against the liberty of the law, which secures to every one the right of submitting to the courts any matters in respect of which he claims redress.'

Creswell J at 839 said, after referring to the particular contractual provision there under consideration:

'In all this I find no attempt to prevent the Courts from exercising their jurisdiction in ascertaining and adjudicating upon the rights of the parties arising out of the contract which they have made.'

Coleridge J said at 841:

'The courts will not enforce or sanction an agreement which deprives the subject of that recourse to their jurisdiction, which has been considered a right inalienable even by the concurrent will of the parties. But nothing prevents parties from ascertaining and constituting as they please the cause of action which is to become the subject-matter of decision by the courts.'

In Dobbs, (supra), their Honours also said, at 652:

'No contractual provision which attempts to disable a party from resorting to the courts of law was ever recognised as valid. It is not possible for a contract to create rights and at the same time to deny to the other party in whom they vest the right to invoke the jurisdiction of the courts to enforce them.'

At the core of this head of public policy is the notion that the citizen is entitled to have recourse to the court for an adjudication on his legal rights. A contractual agreement to deny a person that 'inalienable right' contravenes this public policy and is void. A disincentive to a person to exercise this right of recourse to the court can, depending upon how powerfully it operates to discourage litigation, amount to a

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denial of this right just as complete as an express contractual prohibition against litigation. In Czarnikow v Roth, Schmidt and Company [1922] 2 KB 478, Bankes LJ said at 485:

'No one has ever attempted a definition of what constitutes an ouster of jurisdiction. Each case must depend on its own circumstances. Each agreement needs to be separately considered.'

There is no necessity to assume that only an express ouster of jurisdiction will infringe this head of public policy. Given this and given the importance of the right of the citizen to resort to the court for an adjudication upon his legal rights, it is, I think, at the very least, arguable that a contractual provision that places a substantial fetter on this right of recourse to the court is equally as bad as an express prohibition against going to court."

22 In Bond v Larobi Pty Ltd (1992) 6 WAR 489 at 496 - 500 I made some general comments on these topics which, I think, are applicable here but which I will not repeat. I should also refer to the comments of Heenan J in Baulderstone Hornibrook Engineering Pty Ltd v Kayah Holdings Pty Ltd (1998) 14 BCL 277 at 280. It is important to bear in mind the distinction between a clause which qualifies the existence of a right and one which purports to affect the enforcement of the right: Anderson v G H Mitchell & Sons (1941) 65 CLR 543 at 549 - 50.

23 In my view, the prohibition in cl 6.2(b)(iii) against seeking an injunction is an ouster of the jurisdiction of the court and is void as being against public policy. It goes clearly and permanently to the enforcement of a right that arises under the contract. It is not to the point that the final determination of the rights, liabilities and obligations of each party under the Contract generally fall to be determined (at a later time) in a way that is unaffected by the prohibition. The parties are, and continue to be, in dispute over a myriad of matters, including whether the plaintiffs are entitled to an extension of the date for practical completion, what is the true Definitive Cost Estimate and Target Capital Cost, what is encompassed within approved and other variations, whether there are overruns or underruns and so on. All of these matters survive to be argued on another day. The provision affects one aspect of the contractual rights arising under the Contract, namely the entitlement of the defendants to call on the Guarantee and the right of the plaintiffs to have the Guarantee called on only in strict accord with the relevant terms of the Contract.

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24 The next step is to consider the clause in the context of the whole Contract and the overall relationships between the parties. This is an explicit acknowledgment that this case "depends on its own circumstances" and this Contract "needs to be separately considered". I think the clear inference is that the provision relating to the Guarantee was an important facet of the contractual relationship. It was no mere makeweight. The prohibition therefore places a "substantial fetter" on the contractual rights of the parties, or one of them. This case is quite different to Bond v Larobi Pty Ltd. There, the impugned clause modified the legal and equitable rights of the parties by delaying, but not defeating, access to the courts to have those rights adjudicated upon. Here, while the right to have the overall dispute between the parties adjudicated in the courts survives, so far as concerns the Guarantee, it is defeated. What cl 6.2(b)(iii) does is "take from a party to whom a right actually accrues … his power of invoking the jurisdiction of the courts to enforce it": Dobbs v National Bank of Australasia Ltd (1935) 53 CLR 643 at 652.

25 In my view the prohibition in cl 6.2(b)(iii) is invalid and unenforceable. I note in passing that the prospect of a conclusion of this nature was alluded to (although, contrary to what is said in the headnote, without a decision on the point) in Anaconda Operations Pty Ltd v Fluor Daniel Pty Ltd (1999) 16 BCL 230 at [15]. I will have more to say about that case later.

26 However, the finding that the prohibition offends public policy does not mean that the entire clause falls away. The principles relating to severance are well known: see Hurst v Vestcorp Ltd (1988) 12 NSWLR 394 per McHugh J at 443 - 44. The prohibition against resort to the courts to preserve the right to have the Guarantee called only in strict accord with the relevant terms of the Contract is a discrete part of cl 6 and, indeed, of cl 6.2(b)(iii). The illegal provision is not, in substance, so connected with the other parts of the clause that to remove it would alter the nature of what remains. It is therefore severable.

27 Some of the submissions made by counsel for the defendants might be taken as suggesting that because the words "hinder" and "obstruct" would survive any finding of illegality, the plaintiffs are in much the same position. If that is the tenor of the submission, I do not accept it. Certainly, the clause stands and the plaintiffs are under a contractual prohibition against hindering or obstructing the defendants from proceeding with the conversion of the security. But the words "hinder" and "obstruct" must mean something other than "have resort to the courts for injunctive relief". There might be other conduct that would fall foul of

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the prohibition against hindering or obstructing, but those words cannot be used to circumvent the entitlement of the party to invoke the jurisdiction of the courts.

28 Accordingly, the Court has jurisdiction to entertain the plaintiffs' application for an injunction and I must now go on to consider the proper construction of the Contract.

The Proper Construction of Clause 6

29 The situation, therefore, is that the plaintiffs have, in accordance with cl 6.2, arranged for the Bank to give an unconditional promise to pay as security for the plaintiffs' obligations under cl 1.5.3 of Appendix D of the Contract. That clause relates to the plaintiffs' obligation to meet overruns should the Target Capital Cost be exceeded. The defendants say that this is exactly what has happened. The Target Capital Cost has been exceeded and the plaintiffs are obliged to meet the costs to the capped amount of $5,000,000. The defendants further say that their entitlement to draw down the Guarantee has been triggered. The plaintiffs say that the defendants are entirely wrong in these assertions. They say that, far from there being overruns, the true calculations demonstrate that there are underruns and that, in fact, the defendants owe them money. In other words, there is a dispute between the parties as to their respective contractual entitlements. Against that background, how should cl 6 be construed?

30 The primary focus must be on the terms of the Contract itself. I will be referring to authorities but only for guiding principles. The question that I have to answer is whether, according to the tenor of this Contract, the defendants ought be permitted now to call on the Guarantee. The provisions of a contract itself may qualify the right to call on the undertaking and have recourse to the money: Wood Hall Ltd v The Pipeline Authority (1979) 141 CLR 443 at 459.

31 The starting point is the statement of purpose contained in cl 6.1. The security is to be given "for the purpose of ensuring the due and proper performance of the Contract". I will return to this a little later because there are comments in some of the authorities that stress the importance of the rationale behind the existence of performance guarantees of this type.

32 The focus of attention then shifts to cl 6.2(b). It is to be noted that the security is not directed to the performance by the plaintiffs of all of their obligations under the Contract. It is limited to a discrete part,

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namely, the obligation to meet overruns under cl 1.5.3 of Appendix D, and then to a maximum amount of $5,000,000. At the end of the first part of cl 6.2(b), and before sub-clauses (i), (ii) and (iii), there are the words: "In the event that the Target Capital Cost has been overrun … ". This is, I think, the phrase that is critical to the resolution of this dispute.

33 Clause 6.2(b) then requires, in sub-clause (i), that the defendants must notify the plaintiffs in writing of the amount of the plaintiffs' liability. This has been done. In the 15 June 2000 letter, the liability is said to be $5,000,000 because the overruns are $24,000,000 or thereabouts and therefore exceed the critical figure of $15,000,000. I do not think anything of significance (so far as concerns the construction issue) turns on cl 6.2(b)(i). The next step, in sub-clause (ii), is for the plaintiffs, within 14 days, "to resolve the claim to [the defendants'] satisfaction". Clearly, this has not occurred. Again, from the perspective of a construction issue, nothing turns on this sub-clause.

34 Sub-clause 6.2(b)(iii) is significant. It assumes that the plaintiffs have not resolved the claim within the 14-day period. It then contains four propositions. First, the defendants are then entitled to proceed to convert the security for the amount claimed. In other words, they can draw down the Guarantee. Secondly, the plaintiffs must not hinder or obstruct the defendants from drawing down the Guarantee. Thirdly, the plaintiffs must not exercise any right under cl 32 of the Contract prior to the defendants drawing down the Guarantee. In other words, until the defendants have drawn down the Guarantee, the plaintiffs cannot set in train the process for resolving the contractual disputes, either by arbitration or other forms of alternative dispute resolution or by giving notice that they intend to litigate. Fourthly, the defendants are immune from liability for any loss occasioned by conversion of the security.

35 Clause 6.3 makes it clear that both the form of the security and the identity of the financial institution giving it are within the discretion of the defendants. However, the form of an undertaking set out in Schedule A to the Contract is taken to have been approved. At the heart of this dispute is the question of construction of the Contract. Accordingly, it may not be legitimate to look at the final form of the Guarantee as delivered by the Bank some three months after the signing of the Contract. Nonetheless, regard can be had to the form of undertaking provided in Schedule A. There are some differences between the form in Schedule A and the Guarantee as delivered. However, those differences do not affect, in any material way, the construction of the Contract.

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36 Clause 6.5 is also of critical significance. It says: "If the [defendants] become entitled to exercise any right under the Contract in respect of the security … [they] may in accordance with Clause 6.2 convert the whole or part of the security into money and draw down such money". I say it is of critical significance because there is a question whether it means anything different from, or additional to, that which is contained in cl 6.2(b). According to normal canons of construction, all words are presumed to have some meaning and operation and the courts lean against a construction which will render words otiose.

37 Before I come to the process of reasoning which I intend to apply in construing cl 6, I should examine the relevant authorities to see what, if any, guidance they give in relation to an exercise of this nature. In so doing I repeat what I said earlier. I must construe this Contract. Authorities are useful only in so far as they enunciate or elucidate general principles.

38 I will commence by referring to the rationale behind performance guarantees of this type. In Wood Hall Ltd, Stephen J said, at 457 - 58:

"Their Honours were, with respect, entirely correct in their conclusion that none of the four guarantees is, by any process of implication or construction, to be deprived of the unqualified operation which its express words dictate. Not only does the clear, indeed empathic, language of these guarantees preclude the introduction of any such qualification: to introduce such a qualification would be to deprive them of the quality which gives them commercial currency. Once a document of this character ceases to be the equivalent of a cash payment, being instantly and unconditionally convertible to cash, it necessarily loses acceptability. Only so long as it is 'as good as cash' can it fulfil its useful purpose of affording to those to whom it is issued the advantages of cash while involving for those who procure its issue neither the loss of use of an equivalent money sum nor the interest charges which would be incurred if such a sum were to be borrowed for the purpose. Being 'as good as cash' in the eyes of those to whom it is issued is essential to its function. In Edward Owen Engineering Ltd. v. Barclays Bank International Ltd [1978] 1 QB 159, at p 171 Lord Denning recently described the performance guarantee as standing 'on a similar footing to a letter of credit. A bank which gives a performance guarantee must honour that guarantee according to

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its terms. … (It) must pay according to its guarantee, on demand, if so stipulated, without proof or conditions'. "

39 In Fletcher Constructions Australia Ltd v Varnsdorf [1998] 3 VR 812, Calloway JA said, at 826, that the beneficiary may have stipulated for a guarantee "to allocate the risk as to who shall be out of pocket pending resolution of the dispute". His Honour also said, at 827: "No implication may be made that is inconsistent with an agreed allocation of risk as to who is to 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". There are comments to similar effect (with reference to authorities in the United States of America) by Brooking JA in Bachmann Pty Ltd v BHP Power New Zealand Ltd [1999] 1 VR 420 at 436 - 37.

40 In Cargill International SA v Bangladesh Sugar and Food Industries Corporation [1998] 1 WLR 461 the Court of Appeal also stressed the importance of "the usual characteristics and broad commercial purposes of performance bonds" in deciding a similar issue. The Court held that the performance bond conferred a considerable commercial advantage on the buyer. Potter LJ said, at 468 - 69:

"Not only does the buyer have an unquestionably solvent source from which to claim compensation for a breach by the seller, at least to the extent of the bond, but payment can be obtained from the seller's bank on demand without proof of damage and without prejudice to any subsequent claim against the seller for a higher sum by way of damages. In the circumstances the obligation to account later to the seller, in respect of any overpayment, is a necessary corrective if a balance of commercial fairness is to be maintained between the parties."

41 There have been cases in which injunctions have been granted in circumstances where the contracts have provided for the conversion of the security "if the principal becomes entitled to exercise a right under the contract in respect of the security" or words to that effect. It should be noted that generally speaking, and in the absence of fraud, courts will not injunct the financial institution from paying up under a call: Olex Focas Pty Ltd v Skodaexport Co Ltd (1996) 134 FLR 331 at 348 - 49. But that is not the situation here. What I have to decide is whether, as between the parties to the main contract, injunctive relief should lie to prevent the

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principal calling on the financial institution to pay out the moneys the subject of the security.

42 In Pearson Bridge (NSW) Pty Ltd v State Rail Authority of New South Wales (1982) 1 ACLR 81 there was a provision in the contract which was quite similar to cl 6.5 of the Contract. However, there was no provision equivalent to cl 6.2(b) or cl 32. The principal had purported to cancel the contract because of what it alleged were breaches by the contractor. The contractor claimed it was not in breach but nonetheless accepted the purported cancellation as repudiatory conduct and rescinded the contract. The principal sought to call up the performance guarantee and the contractor sought an injunction to prevent it from so doing. Yeldham J held that although this clause was positive in form, it was negative in substance and defined the only circumstances in which resort might be had to the security. He therefore granted an injunction to prevent the principal from calling up the guarantee until the trial of the contract action.

43 Pearson Bridge was followed in Selvas Pty Ltd v Hansen & Yuncken (SA) Pty Ltd & Anor (1987) 6 ACLR 36. In that case the relevant contractual term was quite different. Pearson Bridge was also followed in Barclay Mowlem Construction Ltd v Simon Engineering (Australia) Pty Ltd (1991) 23 NSWLR 451, J H Evans (NT) Pty Ltd v Diano Nominees Pty Ltd [1989] NTSC 4 and Transfield Pty Ltd v Fuller-FL Smidth (Pacific) Pty Ltd, unreported; SCt of NSW; (Bainton J); 9 May 1997, where the relevant terms were almost identical. In each case the contractor succeeded in obtaining an injunction to prevent the principal from calling on the guarantee until the contractual dispute had been determined.

44 A case which went the other way is Hughes Bros Pty Ltd v Telede Pty Ltd (1989) 7 BCL 210. There, the contractual term read: "Any security provided by the Builder in terms of this Agreement shall be available to the Proprietor whenever the Proprietor may be entitled to the payment of moneys by the Builder …". Cole J, at 216, held the clause permitted the proprietor to have recourse to the securities in circumstances where the proprietor had a claimed entitlement to moneys under the agreement "provided such claimed entitlement is not specious or fanciful". It is not difficult to see why this should be so. The phrase "may be entitled" is permissive and falls short of some more definite establishment of a contractual right.

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45 In the two recent Victorian Court of Appeal decisions to which I have already referred, namely Fletcher Constructions and Bachmann, the Court applied similar reasoning to that used in Hughes but in the absence of permissive language. In Fletcher Constructions the contractor had provided an irrevocable standby letter of credit as security for, among other things, "time damages". The relevant clause read: "The owner may deduct time damages from any moneys due from the owner to [the contractor] under the contract and if that is insufficient [the contractor] must pay the balance of the Time Damages within ten business days … . If [the contractor] fails to pay the balance within the ten business days the owner may have recourse to [the contractor's] security to obtain the balance". The owner claimed time damages but the contractor disputed the entitlement. The owner sought to call on the standby letter of credit.

46 Charles JA referred to the line of authorities starting from Pearson Bridge. His Honour, at 820, noted that the authors of Hudson on Building and Engineering Contracts, 11th ed, had expressed the view that the reasoning in Pearson Bridge was not entirely convincing. At 820-21, he cited, with apparent approval, the conclusion in Hughes that the proprietor could have resort to the security provided its claim was not "specious or fanciful". His Honour went on to construe the contractual provisions relating to time damages. At 825 Charles JA expressed his conclusion in this way:

"The demand was not fraudulent, specious or fanciful, and is not, in my view, open to attack … on the ground that it may simply have been calculated erroneously …

On the interpretation of the agreement which I prefer, however, the parties to the agreement expressly contemplated, as part of the allocation of risk, that [the owner] was to have as security 'an unconditional undertaking to pay' in its favour, and it was only after provision of that security by [the contractor] that [the owner] was required to begin making, and in fact made, payments under the agreement to [the contractor]. To prevent [the owner] now having recourse to such security would, in my view, be to disturb the status quo with respect to the ability of [the owner] to call on the letters of credit."

47 Callaway JA, at 826, recognised that the owner could be restrained from calling the guarantee if to do so would be in breach of a provision of the underlying contract. That prohibition could be express or implied. His Honour considered it significant that the agreement required the

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contractor to proffer "an unconditional undertaking". He thought that as the stipulation for security was intended, among other things, to serve the purpose of allocating the risk as to who would be out of pocket pending resolution of the dispute about time damages, the owner should not be restrained from calling on the letters of credit. His Honour also noted, at 831, "the doubt attending the line of cases that begins with Pearson Bridge … ". Batt JA agreed with both Charles and Callaway JA.

48 In Bachmann the clause (numbered 5.5) read: "A party shall not convert into money security that does not consist of money until that party becomes entitled to exercise a right under the contract in respect of the security". In a comment that may have some significance, Brooking JA (with whom Tadgell and Ormiston JA agreed, a fact that does not appear from the authorised report but which can be gleaned from the version on the database) commenced his judgment, at 421, with these words: "Again we find the contractor or supplier under a building or engineering contract trying to stop the owner demanding payment under a security given by a financial institution."

49 Brooking JA, at 430 - 31, summarised the controversy in this way:

"The issue between purchaser and supplier concerns the words in cl 5.5 'becomes entitled to exercise a right'. The purchaser says they require only that it shall have made a bona fide claim to be entitled to exercise a right under the contract in respect of the security. The supplier says they require something more than this.

Notwithstanding the able argument of [counsel for the supplier], I have not found it easy to determine just what, in his submission, that something more is. … One of the submissions was that a party does not become entitled to exercise a right when a serious dispute is extant. … Another submission made by [counsel] was that the party 'becomes entitled to exercise a right' where the existence of that entitlement has been authoritatively determined."

50 His Honour considered the Pearson Bridge line of authorities, mentioning in addition to the cases that I have included ADI Ltd v State Electricity Commission of Victoria (1997) 13 BCL 337 and Mitsui Kensetsu Corporation Australia Pty Ltd v State of South Australia, unreported, SCQ, 9 August 1990. Like Callaway JA in Fletcher Constructions, Brooking JA had regard to the fact that the contract

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required the giving of an unconditional undertaking. Like both Charles and Callaway JA in Fletcher Constructions Brooking JA, at 436, noted the doubt attending the Pearson Bridge line and expressly adopted the approach that relied on "allocation of risk".

51 His Honour also dealt with Hughes Bros and noted Cole J's comment that "may be entitled" could not be read as "is entitled". However, Brooking JA said of this, at 433: "I entertain a respectful suspicion, however, that 'may be entitled' was used in the form as an archaic way of saying 'is entitled' ". If this is correct, the use of permissive language is not critical to the result in Hughes Bros. If I could diverge for a moment from the discussion of Bachmann, I have also read the decision of Austin J in Reed Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd (1998) 15 BCL 158. The relevant term in that case was identical to that in Hughes Bros except that the words were "shall be entitled " rather than "may be entitled". Austin J distinguished Hughes Bros on that basis. His Honour relied on the Pearson Bridge line and held that the clause required the proprietor's claim to be either determined in the form of a declared sum or to be rendered such, by agreement or arbitral award before the proprietor could convert the security. Whether Fletcher Constructions and Bachmann were cited to his Honour does not appear from the report. Neither case is mentioned in the judgment.

52 In Bachmann, the application for injunctive relief failed. Brooking JA expressed his conclusion, at 436 - 37, in these terms:

"In the present case the matters of conversion of and recourse to the security are dealt with by two general conditions, which should if possible be construed so as to work in harmony. Clause 5.5 prohibits conversion into money until the purchaser becomes entitled to exercise a right under the contract in respect of the security. Clause 22.4 entitles the purchaser to deduct from moneys otherwise due to the supplier any moneys due from the supplier to the purchaser and, if those moneys are insufficient, entitles the purchaser to have recourse to the security. Like clause 3.13(b) in Fletcher, it confers a right of recourse against the security to obtain the balance if the exercise of the right of set-off which it also confers leaves a balance outstanding in favour of the purchaser. It would, as Charles JA said in Fletcher, be strange if the clauses concerned in that case and this – cl 3.13(b) and cl 22.4 - conferred the practical right of recourse only where moneys were 'due' from the supplier to the

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purchaser in some such sense as actually or indisputably due. I would treat cl 5.5 and cl 22.4 of the present contract, read in conjunction, as entitling the purchaser, as between itself and the supplier, to have recourse to the security where according to a bona fide claim made by the purchaser moneys are due to it from the supplier which exceed any moneys due from it to the supplier."

53 In relying on this passage, I have not sought to draw an analogy between cl 22.4 of the contract in that case and, for example, cl 1.5.3 of Appendix D to the Contract. Again, I rely on the discussion of principle.

54 I was referred to one Victorian case where the result went the other way. In Coby Constructions Pty Ltd v Melbourne Glass Pty Ltd, unreported; SCt of Vic; (Gillard J); Library No 8322; 7 April 1998 the relevant term read: "Any security provided by the builder in terms of this agreement shall be available to the proprietor whenever the proprietor is entitled to the payment of moneys by the builder under or in consequence of this agreement …". In that case Gillard J proceeded to determine the construction of the underlying contract in so far as it was relevant to the contractual dispute that had erupted. On that basis his Honour granted an injunction restraining the proprietor from calling up one of two guarantees that were impugned. That, it seems to me, is a different case.

55 The contractual provisions in Anaconda Operations are quite different from those in the cases that I have been discussing and from those in the Contract and there would be little point in considering that decision in detail.

56 I was also referred to FFE Minerals Australia Pty Ltd v Vanadium Australia Pty Ltd [2000] WASC 1. In that case Heenan J, at [10], accepted the reasoning of the Court of Appeal in Fletcher Constructions, especially as regards the allocation of risk. However, the contract required there to be a certificate of practical completion before the proprietor could claim the moneys. The certificate had not then issued. Heenan J regarded this as a critical factor in his conclusion that the proprietor should be enjoined from calling on the guarantee.

57 I am attracted to the general reasoning and approach in the Victorian decisions. It is true that neither in Fletcher Constructions nor in Bachmann did the Court say that it disapproved of the Pearson Bridge line or would not follow it. However, there is clear reference to "doubt" concerning it. In the Pearson Bridge line, there is no reference to the

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rationale behind the provision of these securities. Nor does there seem to have been a consideration of the contractual requirement for the provision of an unconditional undertaking. The categorisation of the contractual terms as negative in substance, though not in form, is a little curious. I do not need to do anything more than reiterate the "doubt" about the Pearson Bridge line. I propose to decide the matter on the basis of the terms of this Contract. I do, however, intend to follow the general approach outlined in Fletcher Constructions and Bachmann.

58 Before leaving this area I need to say one other thing about the cases. Counsel for the plaintiffs submitted that there was a relevant point of distinction between Fletcher Constructions and Bachmann and this case, namely that the Victorian cases dealt with letters of credit and this case involves a bank guarantee, thus rendering comparison difficult. I am not sure that this is correct. The distinction does not seem to have been at the forefront of the minds of Charles, Callaway and Brooking JA respectively or, if it was, it does not readily appear to be so from the reasons for decision. I an not sure that their Honours would have spent so much time on the Pearson Bridge line had they regarded the analogy as being illegitimate. In Fletcher Constructions Callaway JA alluded to the point, at 830 - 31. His Honour referred to an article, "Performance Bonds and Letters of Credit: a Cracked Mirror Image", Debattista, [1997] JBL 289. But, as his Honour pointed out, the distinction is more between bank guarantees and ordinary letters of credit than between bank guarantees and standby letters of credit. For a general discussion of the difference between the two types of letters of credit, see Butterworths Australian Legal Dictionary at pp 684 and 1106.

59 I return now to the Contract itself. Here, the defendants retained complete control over the form of the undertaking and the identity of the provider: see cl 6.3. Schedule A provides the form that the security is to follow and it is indisputably unconditional in character. In it the financial institution (which, for simplicity, I will call "the Bank") "unconditionally undertakes to pay on demand any sum or sums which may from time to time be demanded" by the defendants. It can only be brought to an end (otherwise than by effluxion of time) by an action of the defendants. If called on, the Bank is required to honour the guarantee "forthwith without reference to [the plaintiffs] and notwithstanding any notice given by [the plaintiffs] not to pay the same".

60 The unconditional nature of the undertaking is fortified by the terms of cl 6.2(b)(iii). If the dispute referred to in the sub-clause is not resolved, the defendants "shall be entitled to" convert the security and there is an

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express prohibition against the plaintiffs hindering or obstructing that process.

61 As a pointer to construction, I think the prohibition in sub-clause 6.3(b)(iii) against the plaintiffs exercising rights under cl 32 until after the Guarantee has been drawn down is significant. I have to give meaning to the words "in the event that the Target Capital Cost has been overrun" in cl 6.2(b) and the words "becomes entitled to exercise any right under the Contract in respect of the security" in cl 6.5. Does it require that the Target Capital Cost must have been overrun indisputably and beyond doubt? Does it mean that the defendants must, indisputably and beyond doubt, have become entitled to exercise a right under the Contract, namely to call on the security because of overruns?

62 In the light of cl 32 I do not think the words can have those meanings. Where a claim is made that there are overruns and the other party disputes the claim, cl 6.2(b)(ii) provides a mechanism for the resolution of the dispute. It is crude and unlikely ever to be successful but that is not the point. It is what the parties agreed when they entered into their bargain. The plaintiffs are given 14 days in which "to resolve the claims to the satisfaction of [the defendants]". If they cannot do so, then the entitlement to convert the security springs into life. There could never be a final and authoritative determination of the substance of the dispute before the Guarantee has been drawn down because that determination will depend on alternative dispute resolution mechanisms or litigation both of which are governed by cl 32.

63 There is another factor. In some of the cases the undertaking was open-ended in a temporal sense. That is not the case here. It is an undertaking for a fixed time. It is unlikely that the parties would have contemplated that the parties could, by raising disputes, cause the benefit of the Guarantee to be lost to one of them simply by effluxion of time.

64 Looked at in this way, it seems to me to be a strong pointer that the presumed intention of the parties was, to adapt the language used in Fletcher Constructions, to allocate to the plaintiffs the risk of being out of pocket pending resolution of the dispute.

65 Accordingly, it seems to me that there must be a claim advanced by the defendants and it need not be finally determined before the process of conversion can be entertained. I do not think there is a practical difference between the characterisation of the claim as "not specious or fanciful" or simply that it be "bona fide".

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66 I mentioned earlier a concern that the field may have been covered by cl 6.2(b), leaving cl 6.5 with no effective operation. On close examination, I do not think that is the case. Clause 6 provides for two separate securities. They could be in the form of cash or, alternatively, an approved unconditional irrevocable undertaking. It would have been possible, for example, for one of the securities to have been in cash and the other in the form of the undertaking. Clause 6.5 is on general application. It applies to both securities, that is, to the securities envisaged in cl 6.2(a) and cl 6.2(b). Clause 6.2(b)(iii) applies only to the second of those securities. It provides a comprehensive programme for dealing with a dispute, should one arise, in relation to that security. It is not in any way inconsistent with cl 6.5, nor does it rob cl 6.5 of a field of operation.

67 In my view, prima facie, the proper construction of the Contract is such that once there is a bona fide claim for overruns under cl 1.5.3 of Appendix D and the claim is not resolved within 14 days, the defendants become entitled to convert the security. I say that this is the prima facie position. Regard must now be had to the substance of the dispute in that respect.

Is the Claim Premature?

68 The plaintiffs' case is that cost overruns or underruns can only be assessed upon the final completion of the works and that the claim made by the defendants in the 15 June 2000 letter is premature. Counsel for the plaintiffs conceded that there is nothing in the Contract which expressly says that the assessment must take place at final completion but submitted that upon a proper construction it must be so. I will outline the argument as I understand it.

69 "Overruns" and "underruns" are not themselves defined but are assessed by comparing the Target Capital Cost (or the Definitive Cost Estimate), which are estimates made by the parties of the Actual Capital Cost, with the Actual Capital Cost of the works. Several of the relevant terms are defined in the Contract.

70 "Actual Capital Cost" means the total capital cost to the principal for the design, engineering, procurement and construction management of, and the construction, erection, commissioning, performance testing and final completion of the Process Plant and the Project Works.

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71 "Target Capital Cost" means the estimated capital cost for the design, engineering, procurement and construction management of, and the construction, erection, commissioning performance testing and final completion of the Process Plant and the Project Works.

72 The plaintiffs emphasise the use in these definitions of the words "final completion". The definition of Target Capital Cost was altered in the Supplementary Deed but it still contains a reference to final completion. So too does the phrase "Capital Cost Estimate" which is the subject of Appendix F of the Contract. Appendix F suggests that the costs associated with performance testing are not included within the scope of the Target Capital Cost. I am not sure quite how that fits with the definition of Target Capital Cost but it is probably not material for present purposes.

73 The plaintiffs argue that final completion is the logical common sense stage at which overruns and underruns should be assessed. It gives business efficacy to the underlying purpose of the scheme. It is common ground that final completion has not been reached. Accordingly, the defendants are not entitled to make a claim for overruns at this stage. In this respect the plaintiffs point to a letter written by the defendants on 22 April 1999 in response to, among other things, the plaintiffs' claim that they were entitled to bonuses. In it the defendants said: "Actual Capital Cost cannot be determined until final completion and [the plaintiffs'] claim for this bonus is premature".

74 The defendants seek to counter these arguments by reference to the Contract itself. In the Supplementary Deed several significant changes were made. So far as concerns bonuses, a new cl 1.3.3 was added to provide for the issue of shares in satisfaction of those entitlements. At least in some respects, the shares were to be issued at times before practical completion. In relation to underruns, cl 1.5.2 of Appendix D was amended to provide for the payment to the plaintiffs in cash any underruns to the total amount of the Definitive Cost Estimate, and the amounts of any approved variations made after 30 September 2000 and not included in the Definitive Cost Estimate but to a maximum of $1,000,000. There is similar reference to approved variations in the change to cl 1.5.3 which placed on the plaintiffs the obligation to meet the first $1,200,000 of overruns.

75 The defendants also place reliance on the definition of "Final Completion". It means:

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"… that stage of completion of the Project Works when [the plaintiffs] and all of the project Contractors have fulfilled all of their obligations in relation to the Project Works [except warranty obligations] and in particular:

…

(d) all accounting reconciliations as required by the [defendants] including


•cost ledger reconciliations

•retention reconciliations

•assets register


(e) all outstanding claims in relation to the Project have been settled

… "

76 Counsel for the defendants submitted that it followed from this definition that there was nothing to be done after final completion and certainly, it could not have been envisaged that payment of overruns would occur after that time. It was only after the contractors had fulfilled all of their obligations, including the payment of overruns, that final completion would occur.

77 Counsel also referred to the Definitive Estimate Presentation prepared by the plaintiffs which I think (from the fact that it is part of annexure "JEKG2" to the affidavit of John Knox-Gray sworn 26 June 2000) is part of the Supplementary Deed. The purpose of this document was to set out all the things that are to be included in the Definitive Cost Estimate of $207,994,763. Item 7.3 of the document is entitled "Specific Exclusions" and it describes "those items (inclusive of associated EPCM services) which are specifically excluded from the scope of the estimates". The exclusions include "ore commissioning, performance tests and post commissioning plant modifications". Accordingly, so counsel submitted, not all of the things in the Definitive Cost Estimate and the Target Capital Cost have to be met because some of them are outside the scope.

78 The defendants also argued that, between practical completion and final completion, underruns could not increase but costs could increase so as to reduce or wipe out underruns and give rise to large overruns in respect of which there would be a liability prior to final completion.

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Counsel for the plaintiffs disputed that interpretation. Underruns could increase, for example, by the collection of pay-outs of insurance claims.

79 There are, I think, matters of considerable difficulty in relation to the proper construction of this Contract. It may well be, particularly in relation to the circumstances in which the Supplementary Deed came into existence, a need to have resort to extrinsic evidence as an aid to interpretation. I would not feel confident about making a definitive construction of the Contract so as to decide whether overruns and underruns could be assessed at, and only at, final completion. That is not to say the arguments advanced by the plaintiffs are without substance.

80 On the other hand, I could not say that the case which the defendants wish to advance on this point is not arguable. There are problems with it but it is not specious or fanciful. The plaintiffs point to the fact that in February 1998, and again in May 2000, the defendants mentioned an overrun claim of $1,200,000 and that at no time before the 15 June 2000 letter did they suggest that the overruns were anywhere near $24,000,000. However, the claims for $1,200,000 have to be seen in the context of the amendment to cl 1.5.3 of Appendix D brought about by the Supplementary Deed which obliged the plaintiffs to meet the first $1,200,000 of overruns, whatever may have been the total concerned. I also have a series of affidavits filed on behalf of the defendants which explain the way in which the claim has been prepared and advanced. In the light of that material I could not say that the defendants claim for overruns is other than bona fide, assuming that the dicta in Bachmann that the claim is bona fide has a meaning different from or additional to the notion of a claim that is not specious or fanciful.

81 While on the subject of the affidavits I need, I think, to explain my approach to the substance of the monetary dispute between the parties. Considerable time was taken up at the hearing by the parties going through "the numbers" concerning the dispute. There is a considerable volume of affidavit material on those issues. As counsel for the defendants put it, the material filed by the defendants and the submissions made by him in that regard, were in large part designed to show that on the "big numbers" the plaintiffs had "got it wrong". Interesting as those exchanges were, I have not found it necessary to delve too deeply into them, other than for the purpose of satisfying myself that the defendants claim for overruns was bona fide in the relevant sense. In view of the time and expense that the parties put into the presentation of the material and submissions, I hope the parties will not find it discourteous if I were simply to say that I am so satisfied without having to explain why. This,

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quite clearly, is a matter for another day or, more accurately, other days, weeks or months.

Conclusion of the Proper Construction of the Contract

82 I now return to the proper construction of the Contract, so far as concerns the plaintiffs entitlement to interlocutory relief. I find that the defendants' claim that it is entitled to payment for overruns in accordance with cl 1.5.3 of the Contract is arguable in the sense that I have outlined. I am not able to conclude in favour of the plaintiff, that the claim is premature and that it must await final completion as that term is used and defined in the Contract. Accordingly, that which I earlier described as the prima facie conclusion on the proper construction of cl 6.2 and 6.5 has not been displaced. It does not depend on the final determination of the rights of the respective parties in the underlying contractual dispute. It comes down to the allocation of risk as to who is to be out of pocket pending resolution of a dispute. I think that, in accordance with the presumed intention of the parties, the risk must fall with the plaintiffs.

The Balance of Convenience

83 As I propose not to grant injunctive relief, it is not strictly necessary for me to consider the balance of convenience. I will, however, say something very briefly about it.

84 The plaintiffs put forward material which suggests that there may be a risk that if the Guarantee is drawn down, and the plaintiffs were eventually to succeed in the underlying contractual dispute, then they could not recover the moneys. The defendants put on material to counter that assertion and have claimed to support the assertion that they have made appropriate arrangements to fund their operations.

85 The real detriment to the defendants in a restraint being ordered is twofold. First, they are held out of their money, perhaps for a very long time. No evidence was led to suggest that there was any particular harm or detriment that would follow from the money not being made available, for example, that it was desperately needed to fund the operations and such moneys were not available from other sources. Thus it is only a question of the cost to the defendants of them being held out of their moneys. There is a simple solution to that problem and it has already been taken. The plaintiffs have put up a particular security in an amount of $1,000,000 to support the undertaking as to damages.

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86 The second area of detriment to the defendants is of more significance. The Guarantee expires by effluxion of time. In the circumstances of this case the grant of an injunction would have been, for all practical purposes, final relief. This is because once the Guarantee had expired by effluxion of time the defendants would have lost the right, permanently, to call on it.

87 I had it in mind to explore with the parties the feasibility of requiring, as a condition of the grant of the injunction, that the plaintiffs arrange a further extension of the Guarantee. Had that been possible I would have decided the balance of convenience in favour of the plaintiffs.

Conclusion

88 I would refuse injunctive relief. To the extent that it is necessary, I would also release the defendants from the undertaking that they gave, through counsel, not to call the Guarantee.