Best Tech & Engineering Ltd v Samsung C&T Corporation [No 2]
[2015] WASC 447
•20 NOVEMBER 2015
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: BEST TECH & ENGINEERING LTD -v- SAMSUNG C&T CORPORATION [No 2] [2015] WASC 447
CORAM: CHANEY J
HEARD: 30 OCTOBER 2015
DELIVERED : 20 NOVEMBER 2015
FILE NO/S: CIV 2500 of 2015
BETWEEN: BEST TECH & ENGINEERING LTD
Plaintiff
AND
SAMSUNG C&T CORPORATION
Defendant
Catchwords:
Injunctions - Interim - Performance guarantee - Limitations on exercise of security - Construction of clause containing limitations - Balance of convenience
Legislation:
Nil
Result:
Injunction varied
Category: B
Representation:
Counsel:
Plaintiff: Mr N D C Dillon
Defendant: Mr C G Colvin SC & Mr G D Cobby
Solicitors:
Plaintiff: Moray & Agnew
Defendant: Herbert Smith Freehills
Case(s) referred to in judgment(s):
Bateman Project Engineering Pty Ltd v Resolute Ltd [2000] WASC 284; [2000] 23 WAR 493
Castlemaine Tooheys Ltd v State of South Australia [1986] HCA 58; (1986) 161 CLR 148
Clough Engineering Ltd v Oil & Natural Gas Corporation Ltd [2008] FCAFC 136; (2008) 249 ALR 458
Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812
Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70; (2001) 210 CLR 181
Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451
Reed Construction Services Pty Ltd v Kheng Seng (Aust) Pty Ltd (1999) 15 BCL 158
Twinside Pty Ltd v Venetian Nominees Pty Ltd [2008] WASC 110
Wood Hall Ltd v Pipeline Authority [1979] HCA 21; (1979) 141 CLR 443
Zhu v Treasurer of the State of New South Wales [2004] HCA 56; (2004) 218 CLR 530
CHANEY J: On 18 September 2015, Pritchard J granted an urgent interim injunction on an ex parte basis restraining the defendant (Samsung) from making any or any further request, call or demand for payment on guarantees issued by the Australia and New Zealand Banking Group Ltd (ANZ) for an amount not exceeding US$1,500,000, relating to obligations under a contract entered into between Samsung and the plaintiff (Best Tech). The contract under which ANZ provided the security is entitled 'Roy Hill Ore Project Supply Contract For Supply of Modular Steel' (Contract).
Having granted the injunction until further order of the court, her Honour gave directions for service of the documents on Samsung and for the matter to be listed for further hearing. A further hearing then came before me on 30 October when the continuation of the interim injunction was opposed by Samsung. The question which now falls for determination is whether the interim injunction should be discharged or left in place until the trial of the substantive action.
The substantive action
The writ of summons issued on 18 September 2015 is generally indorsed. In it, Best Tech claims breaches of the Contract by Samsung by failing to pay for works undertaken by Best Tech pursuant to the Contract, and also by asserting, in a notice dated 10 September 2015, an entitlement to call on guarantees provided by Best Tech in accordance with the terms of the Contract. The indorsement contains the following prayer for relief:
1.Performance of the agreement by payment of such amounts due to the plaintiff pursuant thereto or, alternatively, damages.
2.Declarations [sic] that the defendant is not entitled to call on the guarantees pursuant to the notice or otherwise.
Therefore it can be seen that the practical effect of the discharge of the interim injunction would be to defeat the benefit of the declaration sought in the second prayer for relief.
The Contract
Samsung is party to a contract with Roy Hill Holdings Pty Ltd (head contract). Under the head contract, Samsung is responsible for the delivery of engineering, procurement, construction, commissioning and performance testing in relation to the Roy Hill Iron Ore project. The Contract between Best Tech and Samsung is for the supply by Best Tech, as supplier, to Samsung as purchaser, of modular steel for what is referred to as 'package 1' of the project. The total sum certified under the Contract, as of the commencement of these proceedings, is US$104,329,706.01.
Clauses 3.1 and 3.2 of the Contract provides:
3.1Provision
Security shall be provided by the Supplier to Purchaser in accordance with Item 12.
The Purchaser shall have a discretion to approve or disapprove of the form of security and the financial institution giving it.
3.2Recourse
(a)Security shall be subject to recourse by the Purchaser where at least 10 days have elapsed since the Purchaser notified the Supplier of its intention to have recourse subject to the purchaser showing any losses, damages or substantial breaches of BTE's scope of works as a result of actions by BTE. If the Purchaser converts any security into money in accordance with this clause and it is subsequently determined that the relevant amount was not payable by the Supplier under or in respect of the Subcontract then:
(i)the Purchaser must pay back the relevant amount to the Supplier;
(ii)the Purchaser must pay an amount to the Supplier that is calculated by multiplying the relevant amount by the percentage rate of 1% above the current LIBOR;
(iii)costs, fees or charges incurred as a result of the security being converted by the Purchaser to a maximum amount of three percent of the converted amount; and
(iv)the Purchaser will have no further liability to the Supplier in relation to the conversion of the security into money.
(b)Recourse to security shall only occur when there are losses & costs due to demonstrated and fully documented defective workmanship by the supplier or money owing due to costs caused by the supplier to the purchaser that fall into the responsibility of the supplier. Not for any losses caused by third party companies or individuals. However prior to any recourse to security in relation to defective workmanship the Purchaser must provide the Supplier with documentation which provides for an independent third party assessment of any defect. Such assessment is to detail the nature of the defect, the reasons for responsibility being assigned to the Supplier and an estimated cost to rectify the defect.
'Security' is defined to mean either cash, retention moneys, an interest bearing bank deposit, an approved unconditional undertaking or other forms of security approved by Samsung (cl 1). A form of security set out in annexure Part B of the contract is an 'approved' unconditional undertaking for the purpose of the definition of 'security'. It is that form of security which was provided by Best Tech to Samsung in compliance with the requirement in cl 3.1.
The annexure Part B sets out an undertaking to be given by a bank. The undertaking obtained by Best Tech was from ANZ. The form of the undertaking by the bank reads as follows:
2The undertaking
At the request of the Supplier and in consideration of the Purchaser accepting this undertaking by way of security to the Purchaser for the performance by the Supplier of its obligations under the Agreement, the Bank undertakes unconditionally and irrevocably to pay the Purchaser on demand any sum or sums which may from time to time be demanded by the Purchaser to a maximum aggregate of the Amount.
By cl 4(b) of the undertaking, the bank acknowledges that its obligations constitute direct primary, irrevocable and unconditional obligations.
Samsung's notice
On 10 September 2015, Samsung notified Best Tech that it proposed to have recourse to the security at the expiration of 10 days from receipt of the notice by Best Tech (the Notice). The Notice reads as follows:
The Purchaser refers to previous correspondence herein and notes that the Supplier is in breach of the Supply Contract as follows:-
1.Has failed to provide MDR's [manufacturers' data reports] in accordance with the Contract or at all. (Costs being estimated)
2.Has failed to comply with the Contract schedules causing the Purchaser loss and damage in respect of Demurrage charges as previously set out.
3.Has failed to comply with the Contract in respect of the supplied materials which have required substantial defect rectification as previously advised to the Supplier.
4.Has wrongfully purported to suspend the Contract and accordingly is in 'substantial breach' of clause 25.2(b).
In addition to the above on a re-measurement of the Supply Contract there was a significant overpayment ($2,489,775.88) which the Purchaser is entitled to reconcile in respect of the account which details have previously been provided to the Supplier.
The total costs excluding the defect rectification costs significantly exceed the balance of monies due to the Supplier and the amount of the performance bond held as security.
The Purchaser hereby notifies the Supplier that it will have recourse to the Security on demand Bond at the expiration of 10 days from receipt by the Supplier of this letter. Please note that this is a formal notification pursuant to clause 3.2 of the Supply Contract. Please note further that for the purposes of the bond call the Purchaser is not reliant on the defect rectification costs and accordingly is not required to comply with clause 3.2(b). In addition to the bond call the Purchaser will refer all outstanding matters to dispute under the Contract.
Finally, the Purchaser would advise that, strictly without prejudice to the above position, if the Supplier complies fully with its obligations to provide MDR's prior to the expiration of the notice then the Purchaser will postpone a bond call and enter discussions with a view to resolving any outstanding issues.
It was the Notice which prompted Best Tech to apply for the urgent interlocutory injunction so as to prevent Samsung from calling on the security.
It can be seen that, in the Notice, Samsung disavowed reliance, for the purpose of calling on the security, on the third of the alleged breaches of the Contract, namely, the supply of materials requiring substantial defect rectification. At the hearing before me on 30 October, Samsung also disavowed reliance, for the purpose of the interim injunction argument, on the other numbered alleged breaches as providing the basis to call upon the security. Rather, Samsung argued that the claimed overpayments provided a sufficient basis to justify calling on the security. Counsel for Samsung made it clear that that approach for the purpose of the interim injunction hearing was not to be taken as an abandonment of Samsung's claims in relation to the breaches set out in the Notice. Furthermore, Samsung continued to rely on the alleged failure to provide 'MDRs' as being relevant to matters going to the balance of convenience and to the question of whether Best Tech came to the court with clean hands.
Samsung's calculation of alleged overpayment
In the Notice, Samsung quantified the overpayment in the sum of $2,489,775.88, which Samsung 'is entitled to reconcile in respect of the account which details have previously been provided to the supplier'. The reference to the previous provision of details is unclear and neither party was able to direct me any documents containing previously provided details. There was also dispute between the parties as to the proper construction of the word 'reconcile' in the Notice. Best Tech contended that the reference to reconciliation of the overpayment was, in effect, an acknowledgement that a further process needed to be undertaken in order to determine the actual level of alleged overpayment. It argued that the reference was to some amount which would be determined as the final outcome of the amount due under the contract, rather than some presently due debt.
Samsung argues that the reference to 'reconcile' is not a reference to the commencement of a process of reconciliation, but rather that it should be read as in effect, an entitlement to recover the amount that had been overpaid.
In my view, the reference to overpayment should be construed as being a claim to an entitlement to a refund of the amount overpaid. I do not consider that the reference to 'reconcile' suggests that the amount of the overpayment is subject to some further process before its final determination. Rather, I consider it likely that the word 'reconcile' is intended to refer to the process of setting off monies against the balance of monies due to Best Tech, to which reference is made in the following paragraph of the letter.
Samsung was, of course, prevented from calling on the ANZ security by reason of the interim injunction granted on 18 September 2015, two days before the 10 day notice period required by cl 3.2 of the Contract had expired.
Subsequently, on 1 October 2015, some 21 days after the date of the Notice, Samsung wrote to Best Tech concerning a progress certificate in relation to a claim by Best Tech, being progress claim 13. The letter recites that Samsung had previously certified the progress certificate for progress claim 13 at US$0, but had undertaken a review of quantities claimed by Best Tech. The letter enclosed a revised progress certificate for claim 13 which brought to account three alleged overpayments totalling $3,096,432.74 which, when set off against amounts assessed by Samsung as payable to Best Tech, showed a balance in Samsung's favour of US$1,612,461.52. The letter demanded payment of that amount within 10 days of receipt of the revised progress certificate which was incorporated in the letter.
Relevant legal principles
The general principles in relation to interlocutory injunctions are well settled. They were summarised by Mason ACJ in Castlemaine Tooheys Ltd v State of South Australia [1986] HCA 58; (1986) 161 CLR 148, 153 as requiring the plaintiff to show:
(i)that there is a serious question to be tried or that the plaintiff has made out a prima facie case in the sense that if the evidence remains as it is there is a probability at the trial the plaintiff will succeed;
(ii)that the plaintiff will suffer irreparable injury for which damages will not be an adequate compensation unless an injunction is granted; and
(iii)the balance of convenience favours the granting of the injunction.
As Beech J observed in Twinside Pty Ltd v Venetian Nominees Pty Ltd [2008] WASC 110 [9]:
These principles were further explained by Gummow and Hayne JJ in Australian Broadcasting Corporation v O'Neill [2006] HCA 46; (2006) 227 CLR 57, [65] - [71] (Gleeson CJ and Crennan J agreeing). Their Honours stated that the relevant principles are those stated in Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618, where the two main inquiries were said to be whether the plaintiff had made out a prima facie case and whether the balance of convenience favours the grant of the injunction. The phrase 'prima facie case' does not mean that the plaintiff must show that it is more probable than not that at trial the plaintiff will succeed. It is sufficient that the plaintiff show a sufficient likelihood of success to justify, in the circumstances, the preservation of the status quo pending the trial. How strong the probability needs to be depends upon the nature of the rights the plaintiff asserts and the practical consequences likely to flow from the orders the plaintiff seeks: [65], [71].
The principles by which a court will construe a bank's undertaking in a performance guarantee have been the subject of many decisions, most notably the decision of the High Court in Wood Hall Ltd v Pipeline Authority [1979] HCA 21; (1979) 141 CLR 443 (Wood Hall). In that case, Barwick CJ at (445) said that the unconditional nature of the bank's promise to pay on demand cannot be qualified by reference to the terms of the contract in relation to which the security is provided. Observations that such securities are the equivalent to cash were also made by Gibbs J (453) and Stephen J (457 ‑ 458).
In a joint judgment by the Full Court of the Federal Court in Clough Engineering Ltd v Oil & Natural Gas Corporation Ltd [2008] FCAFC 136; (2008) 249 ALR 458 (Clough Engineering), the court acknowledged three principal exceptions to the rule that a court will not enjoin the issuer of a performance guarantee or bond from performing its unconditional obligation to make payment.
The first exception is that the court will enjoin the party in whose favour the performance guarantee has been given from acting fraudulently. The second is that the party in whose favour the performance bank guarantee has been given may be enjoined from acting unconscionably in contravention of trade practices legislation. There is no suggestion of the application of either of those exceptions in this case.
The third exception is that which arises for consideration in this case. The exception was explained by Austin J in Reed Construction Services Pty Ltd v Kheng Seng (Aust) Pty Ltd (1999) 15 BCL 158, 164 where he said:
[I]f the party in whose favour the bond has been given has made a contract promising not to call upon the bond, breach of that contractual promise may be enjoined on normal principles relating to the enforcement by injunction of negative stipulations in contracts.
In Clough Engineering, the court suggested that it 'may be preferable not to describe this as an exception but rather as an overriding rule, because it emphasises that the "primary focus" will always be the proper construction of the contract': see also Owen J in Bateman Project Engineering Pty Ltd v Resolute Ltd [2000] WASC 284; [2000] 23 WAR 493 [30].
In Clough Engineering, the court referred with approval to observations by Charles JA and Calloway JA in Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812 (Fletcher Construction) as to the commercial reasons for the requirement to provide a performance guarantee. The court said at [79]:
In Fletcher Construction, Charles JA at 821 and Callaway JA at 826 recognised that there are generally two commercial reasons why a beneficiary of a performance guarantee may have stipulated for such an entitlement. One is to provide security for a valid claim against the contractor. The second, which is additional to the first, is to allocate the risk between the parties as to who shall be out of pocket pending the resolution of a dispute between them. Callaway JA went on to observe that it is a question of construction of the underlying contract whether the guarantee is provided solely by way of security or also as a risk allocation device. He went on to say (at 827):
'Remembering that we are speaking of guarantees in the sense of standby letters of credit, performance bonds, guarantees in lieu of retention moneys and the like, the latter purpose is often present and commercial practice plays a large part in construing the contract. No implication may be made that is inconsistent with an agreed allocation of risk as to who shall be out of pocket pending resolution of a dispute and clauses in the contract that do not expressly inhibit the beneficiary from calling upon the security should not be too readily construed to have that effect. As I have already indicated, they may simply refer to the kind of default which, if it is alleged in good faith, enables the beneficiary to have recourse to the security or its proceeds.'
It follows from those principles that if Samsung has complied with the requirements of cl 3.2 of the Contract, and if properly construed, cl 3.2 is designed to allocate risk between parties as to who shall be out of pocket pending resolution of the dispute between them, Samsung should not be enjoined by interim injunction from calling on the security even if there is a genuine dispute as to whether Best Tech is ultimately liable for the amounts claimed in the notice.
It also follows that if Best Tech has established a serious question to be tried as to whether Samsung has complied with cl 3.2, then, because cl 3.2 contains, in effect, a promise not to exercise the security without fulfilling the specified requirements, it is open to grant an injunction restraining recourse to the security, having regard to normal principles applicable to interlocutory injunctions.
Proper construction of cl 3.2 of the Contract
Samsung accepts, correctly in my view, that there is a contractual promise on its part not to call on the security if the conditions in cl 3.2(b) are not met.
Best Tech's contention that Samsung should not be permitted to call on the security turns substantially on its contention that the requirements of cl 3.2 have not been met. The parties were at odds as to the proper construction of cl 3.2.
The issues as to construction were:
(i)whether the requirement under cl 3.2(a) for Samsung to 'show any losses, damages or substantial breaches of [Best Tech's] scope of works as a result of actions by [Best Tech]' requires that the notice itself demonstrate those losses, damages or substantial breaches;
(ii)whether any overpayment by Samsung is a loss for the purposes of cl 3.2(a);
(iii)whether a claim for 'money owing' for purposes of cl 3.2(b) must be 'demonstrated and fully documented';
(iv)whether a claim for refund of overpayments can be said to be 'money owing due to costs caused by the supplier to the purchaser that fall into the responsibility of the supplier' for the purposes of cl 3.2(b); and
(v)whether cl 3.2 is designed to allocate risk between the parties in the event of a dispute under the Contract.
Construction issue (i)
Best Tech contends that, on a proper construction of cl 3.2(a), Samsung must, at the time it gives notice of intention to have recourse to the security, particularise the losses, damages or breaches relied upon. In particular, it argues that the purpose of cl 3.2(a) is to enable Best Tech to assess whether to pay any amount claimed and thus avoid recourse to the security, or to allow recourse to the security to proceed. It contends that there is no point to the requirement for 10 days' notice if Best Tech is not able to fully consider its position within that period so as to determine the course of action which it proposes to follow.
Samsung argues that the two requirements in the first sentence of cl 3.2(a) are matters that must be dealt with procedurally before recourse to the security is available. It distinguishes those procedural requirements from the limitations on the right of recourse found in cl 3.2(b). It contends that the requirement for 10 days' notice of intention to have recourse is designed simply to put the supplier on notice for a period of at least 10 days. It contends that the requirement to show 'losses, damages or substantial breaches' is a separate procedural requirement. It argues that the purpose of the procedural requirements is that disclosure of the loss, damage or breach relied upon enables the party providing the security to assess whether the other party is acting in good faith in exercising the security. Samsung contends that, as it has done in this case, it is able to demonstrate those losses or damages at any time, either before or after the 10 days' notice of intention is provided. It accepts that where, as in this case, the demonstration of losses occurs after the notice of intention is given, a question may arise as to whether a further period of 10 days must be provided before the security is called upon. It argues, however, that that issue does not arise in this case because, in the letter of 1 October 2015, Samsung called for payment of the alleged overpaid amount within 10 days, thus effectively providing notice of a further 10 day period before recourse was to be had to the security (had recourse to the security not then been prevented by the interim injunction which had been granted).
Clause 3.2 is poorly drafted. Its purpose is clearly to restrict the otherwise unrestricted capacity of Samsung to call upon the security. Whether the requirements of cl 3.2(a) are said to be procedural or substantive is of no moment ‑ recourse to the security is said to be 'subject to' the two requirements. They are properly to be described as limitations to the right to exercise the security. So far as cl 3.2(a) is concerned, the limitations comprise two elements. The first is that there must be 10 days' notice before the purchaser has recourse to the security. The second is that the purchaser must 'show' the losses, damages or breaches which provide the foundation for recourse to the security. There is much force in Best Tech's submission that the purpose of the requirement for 10 days' notice is to enable it to consider its position in light of the claim being made against it. If the basis of the claim is not 'shown' to it at or before the time that the notice is given, then the purpose of the requisite notice is defeated. The acknowledgment by Samsung in these proceedings that a question arises, where the losses or damages are shown after the notice of intention is given, as to whether a further 10 day period must be granted for recourse, demonstrates the difficulty with the construction for which it contends. If a further period of 10 days' notice is required after the losses or damages are shown, then there is no point in an earlier notice of intention to have recourse having been given. If a further period of 10 days' notice is not required to be given when a later demonstration of the loss or damage occurs, Samsung could immediately exercise the security before Best Tech had sufficient time to consider whether to pay the claim and avoid the call on the security. That would appear to defeat the purpose of requiring 10 days' notice.
The purpose of cl 3.2(a) would appear to be better served by the construction of which Best Tech contends.
I am satisfied that Best Tech has established a prima facie case that, on the proper construction of cl 3.2(a), the purchaser must comply with the requirement to show its losses, damages or substantial breaches no later than the time upon which it gives it 10 days' notice of intention to have recourse to the security.
Construction issue (ii)
A further contention by Best Tech was that the claim by Samsung in relation to overpayment is not capable of characterisation as coming within the expression 'any losses, damages or substantial breaches of [Best Tech's] scope of works as a result of actions by [Best Tech]' and therefore was not capable of being within the subject matter in respect of which recourse to the security was available under cl 3.2. The claim by Samsung is that it has paid various progress claims in amounts which exceeded the amount which Best Tech was properly entitled to claim under the Contract. I see no reason why such overpayments cannot be characterised as losses suffered by Samsung as a result of actions by Best Tech for the purposes of cl 3.2(a). Whether Samsung has complied with the obligation to show the losses is, of course, a separate question.
Construction issue (iii)
In substance, Best Tech's position is that the first sentence of cl 3.2(b) should be construed as follows:
Recourse to security shall only occur where there are losses and costs due to demonstrated and fully documented:
(i)defective workmanship by the supplier, or
(ii)money owing due to costs caused by the supplier to the purchaser that fall into the responsibility of the supplier.
The construction for which Samsung contends is that that sentence should be read as follows:
Recourse to security shall only occur when there are:
(i)losses and costs due to demonstrated and fully documented defective workmanship by the supplier, or
(ii)money owing due to costs caused by the supplier to the purchaser that fall into the responsibility of the supplier.
The construction contended for by Samsung is, in my view, the proper construction of cl 3.2(b). The use of the words 'due to', which follows 'losses and costs' and 'money owing' respectively, renders Samsung's construction more naturally consistent with the whole sentence. Furthermore, the words 'demonstrated and fully documented' more naturally qualify the immediately following words 'defective workmanship'. If those adjectives were intended to apply to 'money owing', it could be expected that cl 3.2 would have been drafted using the type of format I have used above to explain the substance of Best Tech's position. That form of drafting is used in many other parts of the contract.
In my view, the words 'demonstrated and fully documented' do not qualify the expression 'money owing due to costs caused by the supplier to the purchaser that fall into the responsibility of the supplier'.
Construction issue (iv)
Best Tech argues that a claim for reimbursement of money overpaid by Samsung to Best Tech under the Contract does not come within the description 'money owing due to costs caused by the supplier to the purchaser that fall into the responsibility of the supplier'.
Best Tech argues that that expression applies only to the situation where, by reason of some conduct of Best Tech, Samsung had incurred a cost in the sense of having an existing debt to some third party. By way of example, counsel for Best Tech suggested that if costs had been incurred to a shipping supplier because Best Tech were late in meeting its delivery schedules, then those shipping charges would amount to costs for purposes of cl 3.2(b). In the course of his submissions in reply, counsel for Best Tech went so far as to suggest that recourse to the security could only be had so long as those costs remained unpaid, because once paid, they were no longer 'money owing due to costs'.
I do not accept Best Tech's submissions on this issue. In my view, the reference to 'money owing' is a reference to money owing by the supplier to the purchaser. That would suit the commercial purpose of the security, namely to enable Samsung to use the security to satisfy the claim that money is owing to it. Similarly, I see no reason to conclude that an overpayment by Samsung is not capable of being a 'cost' for the purpose of cl 3.2(b). It is an expenditure undertaken by Samsung under the Contract. The overpayment is said to have been caused by Best Tech claiming in excess of its contractual entitlements. If overpayments have been made, the repayment of them can reasonably be said to 'fall into the responsibility of the supplier'.
In my view, Best Tech has not raised a serious question to be tried as to whether a claim for overpayment is capable of falling within the expressions used in cl 3.2(b).
Construction issue (v)
Best Tech argued that, properly construed, cl 3.2 is only directed to the first of the two commercial reasons identified in Fletcher Construction, namely to provide security for a valid claim against the supplier. It contended that the clause did not have as its purpose the allocation of risk between the parties as to who shall be out of pocket pending the resolution of the dispute between them. In the course of argument, I understood counsel for Best Tech to accept that, in the absence of any question as to whether the requirements of cl 3.2 had been complied with, the clause does allocate risk between supplier and purchaser in the event of dispute as to ultimate liability. That concession was correctly made.
That the clause serves the purpose of allocation of risk in the event of a dispute is abundantly clear from the second sentence of cl 3.2(a). That clause specifically deals with the situation which is to pertain in the event that a dispute as to the amount payable is ultimately resolved in favour of Best Tech. That makes clear that the purpose of the clause is to determine who should be out of pocket pending resolution of a dispute.
It follows that, if the requirements of cl 3.2 have been complied with, the court should not interfere with the parties' agreement as to allocation of risk by restraining the exercise of the security.
Has cl 3.2 been complied with?
Samsung argued this application on the basis that the requirement in cl 3.2(a) for Samsung to show any losses was satisfied by its letter of 1 October 2015. As I understand Samsung's position, it did not contend that by nominating the figure of $2,489,775.88, without more, it was meeting the requirement of cl 3.2(a).
The letter of 1 October 2015 came some 21 days after the Notice. That was 11 days after the 10 day period stipulated in the Notice. Having regard to the conclusion which I have reached in relation to construction issue (i), Best Tech has established a prima facie case that Samsung has not complied with the requirements of cl 3.2(a). Therefore Best Tech has established a foundation upon which an injunction restraining Samsung from exercising the security on the basis of the Notice and the letter of 1 October 2015 could be granted.
Balance of convenience
Best Tech contends that, if the security is called upon, it will suffer irreparable harm in its standing with its bankers, to its commercial reputation and in relation to a proposal for it to proceed to a public listing. That contention is supported by an affidavit of Chotic Russamitinakornkul (Mr Chotic), the managing director of Best Tech. Mr Chotic deposed to his belief that Best Tech would suffer serious commercial consequences if the security is called upon, based on a previous experience in April 2014 when a bank guarantee provided by Best Tech was called upon by Forge Group Construction Pty Ltd (Receivers and Managers Appointed) (in Liquidation). That event resulted in Best Tech's Thailand bank, which had issued the request to the Australian bank which provided the guarantee, effectively freezing all of Best Tech's accounts and thereby affecting Best Tech's ability to trade. That event also caused Best Tech's Thailand bank to increase the risk rating of Best Tech, requiring it to provide additional security for a bank guarantee facility provided by its Thailand bank. Mr Chotic said that that increased risk rating will affect Best Tech's capacity to obtain a bank guarantee for a very substantial contract in respect of which it is presently negotiating. He also expressed concern as to the effect on Best Tech's reputation and ability to win future work in the event that the security is called upon.
Generalised assertions to the same effect were made by Mr Martin Lewis, Best Tech's Operations Director, who also deposed that Best Tech is in the process of becoming listed on a public stock exchange and that any loss of reputation will have substantial repercussions.
The evidence as to many of the assertions made by Mr Chotic and Mr Lewis in relation to the consequences of the exercise of the security were the subject of objections by Samsung. The parties agreed that, in view of available time, rulings on the admissibility of the passages to which objection was taken should be deferred until after completion of oral submissions. Counsel for Samsung submitted that, if Best Tech's submissions are confined to matters disclosed in the written submissions, Samsung did not seek a ruling on its objections. In relation to balance of convenience, Best Tech did not go beyond its written submissions and Samsung made no application for ruling on any of its objections. In the circumstances, and acknowledging that the evidence of prejudice was expressed in somewhat generalised and conclusionary statements, I accept that exercise of the security would have adverse consequences for Best Tech of the nature described.
Those consequences must, however, be seen in the context that, provided the preconditions to a call on the security are met, they are consequences which Best Tech has accepted by agreeing to the provision of the security in the Contract.
As noted above, one of the alleged breaches of the Contract referred to in the Notice was a failure to provide MDRs in accordance with the Contract. Requirements in relation to MDRs arise under Part F of the Contract. Part F is comprised of what is referred to as a shop inspection procedure for suppliers for the Roy Hill Iron Ore Project. Clause 6.15 of Part F provides:
6.15.1 The Supplier shall submit an MDR Index to the Purchaser/Principal for review and acceptance in accordance with Attachment #4 of this procedure
6.15.2Supplier shall submit manufacturing inspection and test records/certificates, which provided sufficient information to establish that the equipment or item has passed the necessary tests and inspectors against specified criteria.
6.15.3 The Supplier shall progressively compile the MDR during the execution of the Work and shall make the MDR available for periodic review by the Purchaser/Principal and/or their representative as required.
6.15.4 The Work shall not be considered complete until the Supplier's MDR and those of all Sub Suppliers/Sub Contractors have been reviewed and accepted by the Purchaser/Principal.
Best Tech's position is that its obligation is merely to make MDRs available for review by Samsung pursuant to cl 6.15.3 of Part F, but there is no obligation to provide copies.
The question of provision of MDRs has been the subject of a significant amount of correspondence between the parties between April and July 2015. Samsung relies upon various documents, including a document entitled 'Supplier Drawing and Data Requirements' dated 24 January 2012 (SDDR) and a document, referred to in s 4.1 of the SDDR, entitled 'Supplier Data Requirements List' (SDRL), which have express stipulations as to the provision of documentation, including MDRs, by Best Tech to Samsung. Samsung claims that the applicability of those provisions arises by virtue of cl 6.3 of the Contract, which requires Best Tech to supply to Samsung 'the documents, the number of copies and at the times or stages stated in item 15'. Item 15 is found in Part A of the Contract and identifies the documents to be supplied for the purposes of cl 6.3, the first of which reads 'Refer to SDRL'.
Samsung relied on two affidavits of Mr David Brough. In the second of those affidavits, Mr Brough annexed the SDDR of 24 January 2012, which he said Samsung had provided to Best Tech as part of a 'starter pack' that was provided shortly after Samsung engaged Best Tech pursuant to a letter of intent dated 20 March 2014. In its terms, that document makes clear the obligation of the supplier to provide MDRs to the purchaser. Best Tech, however, points to the introduction to that document found at cl 4.1. That clause commences by stating that '[t]he supplier shall provide documentation in accordance with the supplier data requirements lists (SDRL) attached to the purchase order/contract'. Best Tech asserts, and it appears to be common ground, that no SDRL was in fact attached to the Contract. Therefore, it argues, the SDRL which is found in the SDDR has no application to the Contract. Its contention is, therefore, that where item 15 in Part A specifies 'refer to SDRL', the provision is meaningless since there is no SDRL applicable to this Contract. Accordingly, it argues that there is no obligation under the Contract to do more than make the MDRs available for review pursuant to cl 6.15.3 of Part F.
The Contract should be construed so as to avoid it making commercial nonsense or giving rise to commercial inconvenience: Zhu v Treasurer of the State of New South Wales [2004] HCA 56; (2004) 218 CLR 530 [82]. If a semantic and syntactical analysis of words leads to a conclusion that flouts business common sense, that construction must yield to business common sense: Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70; (2001) 210 CLR 181 [43]. In construing the reference to SDRL in item 15 of Part A of the Contract, consideration of the surrounding circumstances known to the parties, and of the purpose and object of the transaction, is open in order to ascertain what a reasonable person would have understood the reference to mean: Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 [22]. Where, as is the case here, Best Tech had been supplied with a document which was an SDDR, and incorporated an SDRL, in the context of Best Tech's engagement pursuant to a letter of intent, there can be no doubt that the document attached to Mr Brough's affidavit is that to which reference is made in item 15 of Part A of the Contract as it was eventually executed. There would appear to be little, if any, substance to Best Tech's contention that it is not bound to provide the MDRs to Samsung. The question, for present purposes, is how that conclusion impacts on the balance of convenience in relation to the exercise of the security.
As noted above, Samsung does not, for the purposes of the present application, rely upon the assertion of breach of the contract by failing to provide the MDRs as a basis for calling upon the security. In light of that, the dispute in relation to the MDRs is separate and independent from the dispute over compliance with cl 3.2. Whether or not Best Tech is obliged to provide the MDRs does not affect Samsung's entitlement to call on the security (on the basis of overpayment to Best Tech), nor its obligation to comply with the requirements of cl 3.2 before doing so. Whether or not an injunction is granted, the dispute over the provision of MDRs will remain the subject of the dispute resolution procedure which has been invoked in relation to that issue. The issue concerning MDRs does not inform the balance of convenience for the purposes of this application.
Samsung contends that Best Tech's failure to observe its obligations under the Contract to provide copies of the MDRs means that it does not come to the court with clean hands, and is thus disqualified from obtaining relief by way of injunction. Best Tech's response to that contention is that it has offered to make the MDRs available for review, and has thus complied with what it contends is its contractual obligation. Although I consider that Best Tech's construction as to its obligation to provide the MDRs lacks merit, I do not consider that the adoption of a particular construction of the contract relating to a separate and independent dispute from that concerning cl 3.2 amounts to conduct which should disentitle it to injunctive relief.
Conclusion
I have concluded that Best Tech has raised a prima facie case that Samsung is not entitled to call upon the security on the basis of the Notice by reason of a failure to meet the requirements of cl 3.2(a) at the same time as, or prior to, the issue of the Notice. The prejudice asserted by Samsung, if an interim injunction is granted, is that it is prevented from enjoying its contractual entitlement. That contractual entitlement arises only after the fulfilment of specified conditions. Given that Best Tech has established a prima facie case that those conditions have not been met, I consider that the balance of convenience favours the grant of an interim injunction in light of the asserted adverse consequences to Best Tech resulting from the exercise of the security. There should be an interim injunction which restrains Samsung from calling on the security pursuant to the Notice.
I do not consider, however, that the injunction should be continued in the wide terms of that granted by Pritchard J on 18 September 2015. The existing injunction is expressed, upon the usual undertaking as to damages by the plaintiff, as follows:
[U]ntil further order the Defendant (by itself, its officers, servants or agents) be restrained from making any or any further request, call or demand for payment on the guarantees issued by the Australia and New Zealand Banking Group Limited details of which are set out in the Schedule hereto relating to obligations under an agreement entered into between the Plaintiff and the Defendant entitled 'Roy Hill Ore Project Supply Contract for Supply of Modular Steel' and attributed subcontract No ROYSCT‑PO38 ('Agreement') for the supply of fabricated modular steel for the Roy Hill Iron Ore Project or otherwise take any step in furtherance of any call or demand that has been made.
Having concluded that the claim for overpayment is capable of forming the subject matter of a call on the security, I do not consider that the plaintiff has established a serious issue to be tried as to Samsung's entitlement to give proper notice under cl 3.2, having now shown the losses for the purposes of cl 3.2(a). In my view, it is open to Samsung, if it chooses, to issue a further 10 days' notice of intention to have recourse to the security based on the overpayments for which it contends.
It follows that, in my view, the injunction granted on 18 September 2015 should be discharged, but there should be an injunction that, until further order, the defendant (by itself, its officers, servants or agents) be restrained from taking any step or making any request, call or demand for payment on the guarantee issued by the Australia and New Zealand Banking Group Limited based upon the notice of intention to have recourse to the security dated 10 September 2015.
I will hear the parties as to the precise form of the injunction.
2
11
1