Dedert Corporation v United Dalby Bio-Refinery Pty Ltd

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S APCI 2017 0123

DEDERT CORPORATION (US Tax Identification Number 36-2657918)	Applicant
V
UNITED DALBY BIO-REFINERY PTY LTD as trustee for the Power Feed Unit Trust (ACN 163 072 544)	Respondent

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JUDGES:	WHELAN, PRIEST and KAYE JJA
WHERE HELD:	MELBOURNE
DATE OF HEARING:	5 December 2017
DATE OF JUDGMENT:	12 December 2017
MEDIUM NEUTRAL CITATION:	[2017] VSCA 368 First Revision: 15 December 2017
JUDGMENT APPEALED FROM:	Dedert Corporation v United Dalby Bio-Refinery Pty Ltd (Unreported, Supreme Court of Victoria, 29 November 2017)

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BUILDING CONTRACT – Appeal – Respondent seeking recourse in respect of claim for unliquidated damages for breach of contract – Refusal to grant interlocutory injunction to restrain respondent from exercising recourse to a commercial guarantee – Construction of contract – Whether trial judge erred in construing that contract did not contain restriction on right to have recourse to the guarantee – Whether money due and payable under the contract – Appeal allowed – Contract precludes recourse to guarantee – RCR O’Donnell Griffin Pty Ltd v Forge Group Power Pty Ltd (rec and mgr appt) (in liq) [2016] QCA 214 applied - Bachmann Pty Ltd v BHP Power New Zealand Limited [1999] 1 VR 420 distinguished – Fletcher Construction Australia Limited v Varnsdorf [1998] 3 VR 812 – distinguished.

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APPEARANCES:	Counsel	Solicitors
Applicant	Mr M Osborne QC with	B2B Lawyers
Mr J Whelen
Respondent	Mr S R Horgan QC with	Pointon Partners
Mr B J Murphy

WHELAN JA:

I have read in draft the reasons of Kaye and Priest JJA. Unfortunately, I find myself unable to agree with them. I adopt Kaye JA’s recitation of the relevant factual matters and of the relevant contractual provisions.

In my opinion leave to appeal should be refused. In summary, my reasons are the following:

(1)The role of ‘unconditional’ securities of the kind in issue here, as being the functional equivalent of cash, is of fundamental importance.
(2)There is no doubt that the respondent has a contractual right as against the bank to call up the security. It can only be prevented from doing so if the contract between the respondent and the applicant contains an implicit prohibition on it doing so. There is no explicit prohibition.
(3)The implicit prohibition relied upon by the applicant before the trial judge was cl 5.2. The argument was that cl 5.2 comprehensively prescribed the circumstances in which recourse could be had to the security and, thus, recourse in other circumstances is implicitly prohibited. The trial judge rejected this contention. He was clearly correct to do so. Before us, it was accepted that cl 5.2 is not comprehensive. At the least, recourse is also permitted in the circumstances provided for by cls 39.7 and 39.9.
(4)The contractual submissions made by both parties were shifting and bore the hallmarks of arguments constructed in an atmosphere of urgency. Potentially important matters, such as the application and effect of the Queensland Building and Construction Commission Act1991 (Qld) (‘QBCC Act’), and of cl 39.7 of the contract, were not adequately addressed.
(5)The balance of convenience overwhelmingly favours the respondent. The terms of the undertaking the respondent gave the trial judge, and which it proffered to this Court, mean the applicant will suffer little, if any, detriment if the injunction is not granted. On the other hand, granting the injunction is likely to have the effect of depriving the respondent of the security provided for by the contract, and of precluding it from exercising the undoubted contractual right which it presently has against the bank.
(6)I do not consider that this Court’s decisions in BachmannPty Ltd v BHP Power New Zealand Ltd[1] and Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd[2] and the decision of the Full Court of the Federal Court in Clough Engineering Ltd v Oil & Natural Gas Corporation Ltd[3] are distinguishable. I consider that the decision of the Queensland Court of Appeal in RCR O’Donnell Griffin Pty Ltd v Forge Group Power Pty Ltd (rec and mgr appt) (in liq)[4] is distinguishable, and to the extent it is not, I prefer the analysis in Bachmann, FletcherConstruction and Clough Engineering. The decisions in Bachmann and Fletcher Construction are particularly significant in relation to the construction of cl 39.7.
[1][1999] 1 VR 420 (‘Bachmann’).
[2][1998] 3 VR 812 (‘Fletcher Construction’).
[3](2008) 249 ALR 458 (‘Clough Engineering’).
[4][2016] QCA 214 (‘RCR O’Donnell Griffin’).

Role of ‘unconditional’ securities other than cash

It is important to recall at the outset why arrangements of the kind provided for by cl 5.1 (incorporating the definition of ‘security’ in cl 1.1) of the contract exist. They exist so as to provide to a party contractually bound to either provide security, or to have portions of amounts otherwise payable to it deducted and retained by the other party, with an alternative to cash. Cash is, of course, one option which is still available. In the definition of ‘security’ in this contract it is the first option. The non-cash alternatives give the party that must provide the security a cash flow advantage, but this advantage can only be available for so long as the security provided is as good as cash. As Stephen J explained in Wood Hall Limited v Pipeline Authority:

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.[5]
[5](1979) 141 CLR 443, 457 (‘Wood Hall’).

Prevention of calls on the security

For reasons explained by the High Court in Wood Hall, attempts made by parties who have provided security to prevent financial institutions paying under ‘unconditional’ guarantees, letters of credit or other similar undertakings almost invariably fail. The party seeking to prevent recourse cannot prevent the financial institution paying in accordance with the terms of the instrument between the institution and the party entitled to the benefit of the security.

In the usual case, a party which has provided security can only prevent the financial institution paying by enjoining the party entitled to the benefit of the security from calling upon it. Absent fraud or unconscionability, it can only do this by establishing the existence of a contractual prohibition on calling on the security. There are inherent difficulties in that course which were explained by Callaway JA in Fletcher Construction.Callaway JA said:

A moment’s reflection will show that the beneficiary, unlike the bank, may be restrained if there is an express prohibition in the underlying contract against calling upon the guarantee. In theory an implicit or implied prohibition is just as good. The practical problem is that it is much harder to establish. That is not because of a requirement that an implicit or implied prohibition against calling upon a guarantee must be clear. It is because the implication cannot be made if it would stultify, or even if it would be inconsistent with, the purpose for which the guarantee was taken.
I should explain the sense in which I am speaking of express, implicit and implied prohibitions. By an express prohibition I mean a provision of the underlying contract, which may be positive or negative in form but is specifically directed to calling upon the guarantee, as for example a provision saying that it shall not be called upon during stage 1 of a contract to be performed in stages or, as in this case, that it is necessary to give 10 days’ notice before calling upon it. A provision simply saying that recourse may be had to the guarantee for moneys due or the like is not an express prohibition in the sense that I intend. The question in a case like that is whether a prohibition against recourse is implicit in the words of the contract. By an implied term I mean a term of the kind associated with the decision of the Privy Council in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266. Implication is the process of discerning either an implicit or implied term.[6]

[6]Fletcher Construction [1998] 3 VR 812, 826.

The contract in question here does not contain any explicit prohibition on calling upon the security. Clause 5.2, and cls 39.7 and 39.9 as well, are provisions which say, to use Callaway JA’s words ‘that recourse may be had to the guarantee for moneys due or the like’. They are not express prohibitions. There is said to be an implicit or implied prohibition. This is on the basis that the contract comprehensively prescribes the circumstances in which the security can be called upon (notwithstanding that those circumstances are not reflected in the terms of the guarantee itself) and that accordingly recourse to the security in other circumstances (even if within the terms of the guarantee itself) is prohibited.

The argument rejected by the trial judge

It seems from the trial judge’s reasons that the argument he addressed, and rejected, was a contention that cl 5.2 alone prescribed the circumstances in which the security could be called upon. By the time the matter reached us, the applicant accepted that that could not be correct.[7] At the least, cls 39.7 and 39.9 also provide for circumstances in which recourse may be had to the security. The terms in which they do so are not the same. Clause 5.2 requires that there be a sum unpaid ‘after the time for payment’, and a requirement referable to ‘time’ also appears in cl 39.9. This feature is not, however, present in cl 39.7.
[7]Applicant’s Written Case [6].

Clause 39.7 is in terms which are, in my view, relevantly indistinguishable from the terms considered in Bachmann and Fletcher Construction where it was held, in substance, that they were to be construed as entitling a party to call on security where it had made a bona fide claim that a sum was due and payable, and without having to establish that the claimed sum was in fact due and payable.

Nature of the submissions made

The parties have been in dispute for some time, but we were told on the hearing that matters came to a head on 10 November 2017 when the solicitors for the applicant advised the respondent that the applicant would not extend the bank guarantee beyond its then expiry on 15 November 2017. There is a dispute between the parties as to when the date of practical completion was. Accordingly, the parties are also in dispute as to the time for release of the security. The applicant’s position is that that time has already passed. The respondent’s position is that the applicant is contractually bound to maintain the security until 22 December 2017. In the context of these legal proceedings, the applicant has extended the security until 22 December 2017.

The letter of 13 November 2017 which contained the claim that the applicant was in breach of the contract, and which gave the applicant the five days’ notice provided for cl 5.2, was prompted by these circumstances.

The claim made in the letter of 13 November 2017 was quantified in an affidavit of John Anthony Foster sworn 14 November 2017. Mr Foster is an engineer employed by the respondent who, we were told, the respondent contends is the superintendent, a proposition which is not accepted by the applicant. He quantified the claim at $866,354.29.

The applicant urgently sought an injunction. The trial judge ruled on the application on 29 November 2017 in circumstances where the guarantee was then to expire on 3 December 2017, with attempts being made to extend it. It was subsequently extended.

In my view the submissions made by both parties in relation to construction of the contract bore all the hallmarks of the urgency with which the matter had been brought before the Court. The applicant’s fundamental contention in relation to where the implicit prohibition resided was different in the way it was put to us than the way in which it had been put to the trial judge. In contrast to the contention rejected by the trial judge, it was not contended before us that cl 5.2 was the only potential avenue of recourse. Before the trial judge little or no reference was made to the potential effect of the QBCC Act, other than in the specific context of addressing the relevance of cl 46.3. Before us, submissions which had clearly not been fully considered were made as to the effect of that Act. Clause 39.7 was given little consideration or attention. Given its close similarity to the clauses that were significant in Bachmann and Fletcher Construction that clause seems to me to be potentially most significant.

Further, it became clear in the course of the hearing before us that circumstances might well arise in the immediate future which would, or may, significantly alter the contractual analysis. We were told that the person who purports to be the superintendent might well assess the respondent’s claim under cl 43, or might issue a final certificate under cl 39, within the immediate future.

The balance of convenience

The undertaking given to the trial judge on behalf of the respondent, and proffered to this Court, means that the balance of convenience is overwhelmingly in favour of the respondent. If the injunction is granted the respondent may very well lose the benefit of its security, and it will be precluded from exercising the contractual right which it has against the bank. On the other hand, if the injunction is not granted the applicant will suffer little, if any, detriment. The only potential detriment to the applicant is what would effectively amount to a temporal extension of the obligation to provide security. But that will not become an actual ‘detriment’ unless it is found liable on the respondent’s claim. I put detriment in quotation marks as I am not persuaded that the potential to avoid payment of a valid claim should be so described.

In practical terms, if the respondent calls on the guarantee, while subject to the undertaking which it has proffered, it will be doing little more than substituting one approved form of security as defined in cl 1.1 (either (e) — an approved unconditional undertaking, or (f) — other form approved) for another approved form of security ((a) — cash).

The applicant accepted that the balance of convenience favoured the respondent. It nevertheless submitted that this Court should reach a final view on the construction issues and, if it did so, the balance of convenience would become irrelevant because the Court would find that there is an implicit prohibition upon calling upon the guarantee.

The implicit prohibition

For the reasons already outlined I am not persuaded that in the particular circumstances of this case this Court should reach a final determination on the issue of whether or not the claim made in the letter of 13 November 2017 is a claim in relation to which the security can be called upon.

In any event, on the current state of the arguments, I am not persuaded that the applicant has established the existence of an implicit prohibition. In particular, I am unpersuaded that the respondent is not entitled to call upon the security relying upon cl 39.7.

I reach this conclusion relying upon the decisions of this Court in Bachmann and Fletcher Construction and upon the decision of the Full Court of the Federal Court in Clough Engineering. I consider that those decisions are on point and are not distinguishable. On the other hand, in my view the decision of the Queensland Court of Appeal in RCR O’Donnell Griffin is distinguishable and, to the extent that it is not, I prefer the analysis in Bachmann, FletcherConstruction and Clough Engineering.

The relevant authorities

The first case in point of time is Fletcher Construction. FletcherConstruction concerned what, upon analysis, was said to be an implicit prohibition upon calling on the security. Shortly after Fletcher Construction was decided an application for an injunction concerning a contract with an explicit prohibition came before this Court in Bachmann.It is convenient to turn to Bachmann first, where there was an explicit prohibition.

The particular claim in issue in Bachmann was a claim for rectification costs, like the claim made here. There was an arbitration already on foot between the parties. It is important to note the precise terms of the relevant clauses in Bachmann. Clause 5.5 of the contract in Bachmann provided that a party ‘shall not’ convert the security into money ‘until the party becomes entitled to exercise a right under the Contract’. This was the explicit prohibition. The only relevant ‘entitlement’ relied upon was cl 22.4 which provided:

The Purchaser may deduct from moneys otherwise due to the Supplier any moneys due from the Supplier to the Purchaser and if those moneys are insufficient, the Purchaser can have recourse to the security under the Contract.[8]

[8]Bachmann [1999] 1 VR 420, 424.

The purchaser maintained there was an ‘entitlement’ to convert the security into money whenever it had a bona fide claim that it was entitled to exercise a right under the contract, and that money was ‘due’ whenever it had a bona fide claim that money was due to it. The supplier maintained that a bona fide claim was not sufficient.

The judgment of the Court of Appeal was delivered by Brooking JA.

Brooking JA explained that regard could not be had to the terms of the guarantee itself, because those terms had been agreed after the contract had been concluded, but he said that it was appropriate to have regard to the fact that the contract required the guarantee to be ‘unconditional’.[9] The fact that the guarantee was required to be ‘unconditional’ was one factor which led Brooking JA to conclude that the intention of the parties was to allocate risk, in the sense of providing for which party should be out of pocket pending the resolution of a dispute.[10]
[9]Ibid 435.
[10]Ibid 437.

Brooking JA rejected a construction of the relevant provisions which would require the person seeking to call on the security to establish that the relevant claim was ‘actually or indisputably’ due. He said:

I would treat cll 5.5 and 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.[11]

[11]Ibid.

A further factor relied upon by Brooking JA in reaching this conclusion was that, if the supplier’s construction of the provisions was correct, the purchaser would have to accept from the outset that its security ‘[would] almost certainly implode long before recourse becomes permissible’.[12]
[12]Ibid.

The earlier decision of this Court in Fletcher Construction concerned a position where there was no express prohibition on calling upon the security.

The relevant claim in that case was for what was described as ‘time damages’. The provision governing time damages (cl 3.13) began with the words ‘[i]f [Fletcher] does not reach Handover by the Date for Handover, it must pay Time Damages … ‘. The clause went on to provide for an entitlement to deduct time damages from monies otherwise due and to provide that if Fletcher failed to make up any shortfall ‘the Owner may have recourse to [Fletcher’s] security to obtain the balance’.[13] There was also a set off provision (cl 5.7) which relevantly provided:

The Owner may deduct from payments to [Fletcher] and from the security provided by [Fletcher] any amounts … which [Fletcher] owes to the Owner.[14]

[13]Fletcher Construction [1998] 3 VR 812, 815.

[14]Ibid.

The parties were in dispute as to whether Fletcher had failed to reach handover by the required date and also as to the quantum of the time damages. The trial judge had held that there was a serious issue to be tried as to both of those matters.

The party which had provided the security, Fletcher, maintained that the owner could only have recourse under cl 3.13 if it had been established, or if it was undisputed, that Fletcher had not reached handover by the required date. Likewise, it was contended that the owner could only deduct payments from the security under cl 5.7 if it were established, or if it were undisputed, that the money was ‘owed’ to the owner.

Charles JA rejected these propositions. He said:

The critical question which this court must decide is whether the relevant commercial purpose of the agreement was to provide security to Varnsdorf [the owner], so that a valid claim to damages (whether or not Time Damages) would be secured or whether clauses such as 3.13 made provision for an allocation of the risk between Fletcher and Varnsdorf — showing which party was to be out of pocket pending resolution of any dispute.[15]

[15]Ibid 821.

Charles JA concluded that the provisions constituted an allocation of risk. He gave five reasons for reaching this conclusion.[16]
[16]Ibid 821–3.

The first reason, which he described as being of ‘great importance’, was the fact that pursuant to the contract the relevant guarantee was required to be ‘unconditional’.

The second reason was that the contract provided for a certification procedure which had been followed, notwithstanding that the dispute had then been referred to arbitration.

The third reason was that the contract, in Charles JA’s view, gave the owner the ability to exercise ‘self-help’. He said that this capacity to exercise ‘self-help’ was to be found in both cl 3.13 and cl 5.7. Charles JA said the use of the term ‘owes’ in cl 5.7 gave Fletcher no assistance.

The next matter relied upon by Charles JA was what was said to be an absence of ‘qualifications’ upon the owner’s right to call on the security in cl 3.13. In my view, it is difficult to see how that factor was properly a reason for rejecting Fletcher’s contention. Fletcher maintained the qualification was in the introductory words themselves, namely, ‘[i]f [Fletcher] does not reach Handover by the Date for Handover ‘In this context Charles JA also referred to the fact that the owner had not been obliged under the agreement to make any payment at all to Fletcher until Fletcher had provided the security.

The final factor relied upon by Charles JA was the fact that, should Fletcher subsequently be held to be correct, if the security had been called on, Fletcher would be able to have the money returned with interest.

Callaway JA addressed the nature of the prohibition that might exist in a contract, in the terms which I quoted earlier, and then referred to the fact that there were two reasons why a beneficiary may stipulate for a guarantee. One was to provide security, and the other was to allocate risk. If, upon a proper construction of the contract, the commercial purpose was to allocate risk, Callaway JA described the consequence as follows:

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 explicitly 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.[17]

[17]Ibid 827.

Callaway JA rejected the contention that cl 3.13 required that the failure to reach handover by the required date must be either established or undisputed, and he also rejected the contention that cl 5.7 required that it be established that a particular sum be ‘owed’. He considered, like Charles JA, that all that was necessary was ‘a bona fide claim’.[18] Like Charles JA, he took into account the fact that the security was required to be ‘unconditional’ but he did not take into account the terms of the security itself as they had been made and approved after the contract.[19]
[18]Ibid 828.
[19]Ibid 828–9.

Batt JA agreed with both Charles JA and Callaway JA.

A substantially identical approach to that adopted in Bachmann and Fletcher Construction was adopted by the Full Court of the Federal Court in Clough Engineering. Indeed, in Clough Engineering the Full Court of the Federal Court endorsed the Court of Appeal’s approach in Bachmann and Fletcher Construction at every opportunity.[20] The position of the party seeking to call on the guarantee was enhanced in Clough Engineering because the terms of the guarantee itself were incorporated into the contract.[21] But, that does not detract from the unqualified endorsement given by the Full Court to this Court’s analysis. More significantly, the Full Court stated that the ‘starting point’ was the fact that the contract required the guarantee to be ‘unconditional’.[22] So does the contract here, as the contract also did in Bachmann and in Fletcher Construction. In each of Bachmann and Fletcher Construction the terms of the guarantee were not taken into account because those terms were made after the contract. It remained significant that the contract required the guarantee to be ‘unconditional’, as it does here, and as it did in Clough Engineering.
[20]Clough Engineering (2008) 249 ALR 458, 479 [81], 480 [83], 482–4 [101]–[112].
[21]Ibid 481–2 [91]–[100].
[22]Ibid 481 [88].

The Queensland Court of Appeal in RCR O’Donnell Griffin rejected this approach holding in relation to a clause substantially identical to cl 5.2, and where there was a set off provision, that a bona fide claim was not sufficient. It may be significant in that context that the Court in RCR O’Donnell Griffin was in a position to decide, and did decide, the substantive dispute itself. It finally determined that no sum was in fact due. As McMurdo JA observed:

The implication that a security could be called upon merely where there was a claim in good faith could have no operation once the absence of merit in that claim was established.[23]
[23]RCR O’Donnell Griffin [2016] QCA 214, 24 [96].

Application of the relevant authorities

Clause 39.7 here is in relevantly similar terms to the set off provisions which were dealt with in both Bachmann and Fletcher Construction. It seems to me that the conclusions as to construction reached in Bachmann and Fletcher Construction apply to the construction of cl 39.7 for substantially the same reasons. To the extent RCR O’Donnell Griffin reaches a different conclusion, and is not distinguishable, I prefer the reasoning in Bachmann and Fletcher Construction.

This means that a bona fide claim that a sum is due and payable is sufficient to justify recourse to the security under cl 39.7.

The claim made here may not fall under cls 5.2 or 39.9 as both of those provisions require or envisage the existence of a time for payment. That may be an insuperable obstacle. That is not the case, however, in relation to cl 39.7. The respondent does claim that an amount is ‘due and payable’ to it by the applicant. There was no submission made that the claim is not bona fide.

The trial judge’s reasoning

The trial judge rejected the contention that cl 5.2 prescribed the circumstances in which the security could be called upon, and, in my view, it is now clear that, on the narrow basis upon which the issue was put to him, he was correct. He distinguished RCR O’Donnell Griffin and I consider he was correct in doing so. He

took cl 39.7 and cl 46.3 into account and those clauses were relevant. In my view, cl 39.7 was more relevant than cl 46.3. He concluded the security was a ‘risk allocation device’ and I consider he was correct in that. The critical factor here is the fact that the contract requires the guarantee to be ‘unconditional’. He was clearly correct on the balance of convenience and that was accepted before us.
Conclusion

I would refuse leave to appeal because the balance of convenience overwhelmingly favours refusal of the injunction, because I consider that this is a case where the Court should not finally determine the construction issues raised, and because, if the construction issues are to be determined, I prefer the conclusion reached by the trial judge as it seems to me that that conclusion is consistent with the reasoning in Bachmann and Fletcher Construction.

I would refuse leave, not because the proposed grounds do not have a real prospect of success, but because the applicant will suffer no significant detriment, even if the trial judge’s refusal of the injunction is later held to have been wrong, because of the undertaking given. Decisions of trial judges on applications of this kind should not be the subject of appeal where the disaffected party would suffer no significant detriment should the decision transpire to be wrong.

PRIEST JA:

Substantially for the reasons advanced by Kaye JA, whose judgment I have had the advantage of reading in draft, I agree that leave to appeal should be granted and the appeal should be allowed. I agree with the orders that his Honour proposes.

The principles governing the interpretation of commercial contracts were summarised by French CJ, Nettle and Gordon JJ in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd[24] as follows:[25]
[24](2015) 256 CLR 104. See also Electricity Generation Corporation v Woodside Energy Ltd and Others (2014) 251 CLR 640, 656–7 [35] (French CJ, Hayne, Crennan and Kiefel JJ).
[25]Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104, 116–17 [46]–[49] (citations omitted).

The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.
In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That inquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.
Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.
However, sometimes, recourse to events, circumstances and things external to the contract is necessary. …

Their Honours also said:[26]

Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption ‘that the parties … intended to produce a commercial result’.[27] Put another way, a commercial contract should be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience’.[28]

[26]Ibid 117 [51].

[27]Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at 657 [35], citing Re Golden Key Ltd [2009] EWCA Civ 636 at [28].

[28]Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at 657 [35], citing Zhu v Treasurer (NSW) (2004) 218 CLR 530 at 559 [82].

It was not submitted in the present case that the Court should look to anything external to the contract in order to determine the meaning of its terms. Thus, the terms of the contract — including, critically, cl 5.2 — fall to be interpreted solely according to the language used (bearing steadily in mind, of course, its commercial purpose).

In the respondent’s letter of 13 November 2017, it was said:

United’s position is that Dedert has not complied with its obligations under the Contract and that United has suffered direct losses equalling or exceeding the amount of the Bank Guarantee in respect of the matters set out below.

Thereafter, the letter set out eight ‘claims’ relating to ‘the System’ and associated matters (which I need not repeat), and asserted:

Accordingly, United will call on the Bank Guarantee at the expiry of the relevant notice periods in accordance with its rights under the Contract. We note in this regard that the Contract at clause 5.2 specifies a notice period of 5 days and the Bank Guarantee specifies a notice period of 14 days.

In my view, cl 5.2 cannot bear the interpretation urged by the respondent. Clause 5.2 provides:

5.2 Recourse
Security shall be subject to recourse by a party who remains unpaid after the time for payment where at least 5 days have elapsed since that party notified the other party of intention to have recourse.

On a plain — and unstrained — reading, cl 5.2 permits a party to the contract to have recourse to the security — where that party remains unpaid after the time for payment — so long as at least five days have elapsed since that party notified the other of its intention to have recourse to the security. Before there may be recourse to the relevant security, cl 5.2 requires a party to remain unpaid in circumstances where the time for payment has expired. As Philip McMurdo JA (with whom Applegarth J agreed) put it in RCR O’Donnell Griffin Pty Ltd,[29] in relation to a clause in the same terms as the present cl 5.2:[30]

By cl 5.2 of the Subcontract in this case, the security was subject to recourse ‘where [the Principal] remains unpaid after the time for payment’. On the ordinary meaning of those words, the precondition to recourse to the security was the fact of money being unpaid to the Principal. Clause 5.2 was not in terms which referred to a belief, or grounds for a belief, that money remained unpaid. Because recourse to the security was permitted only where in fact money remained unpaid, in my view it was necessarily implied that recourse was not permitted, and that the Principal should not attempt to have recourse to the security, where there was not money which remained unpaid to it. There was thereby a negative stipulation which could be the basis for an injunction restraining Forge from making demand on the bank guarantees. In my view, the unambiguous terms of cl 5.2 should not be construed as they were by the primary judge.

[29]RCR O’Donnell Griffin Pty Ltd v Forge Group Power Pty Ltd (Receivers and Managers Appointed) (in liq) [2016] QCA 214.

[30]Ibid [95]. See also Tomkins Commercial and Industrial Builders Pty Ltd v Majella Towers One Pty Ltd [2017] QSC 202, [100] (Brown J).

Kaye JA has referred to various provisions of the contract which provide a mechanism by which moneys may become ‘due and payable’. I need not repeat them. None has application.

Counsel for the respondent submitted that the letter of 13 November 2017 constituted notice of a claim under cl 43.1 of the contract. Clause 43.1 is in the following terms:

43. NOTIFICATION OF CLAIMS
43.1Communication of claims
The prescribed notice is a written notice of the general basis and quantum of the claim.
As soon as practicable after a party becomes aware of any claim in connection with the subject matter of the Contract, that party shall give to the other party and to the Superintendent the prescribed notice or a notice of dispute under subclause 45.1.
This subclause and subclause 43.3 shall not apply to any claim, including a claim for payment (except for claims which would, other than for this subclause, have been included in the final payment claim), the communication of which is required by another provision of the Contract.

Beyond asserting that it has ‘suffered direct losses equalling or exceeding’ the amount of the security, the letter does not provide any detail as to quantum — for that one has to look elsewhere — although it does set out a ‘general basis … of the claim’ made by the respondent. Hence, so it seems to me, the respondent’s claim is one for unliquidated damages, in circumstances where, although damage may have flown, and a cause of action may have accrued, for breach of contract, the money

value of any damages flowing from that alleged breach have not been specified.

Thus, in my view, no sum remains unpaid and no time for payment has expired. In these circumstances, cl 5.2 constitutes a negative stipulation providing a basis for an injunction restraining the respondent from having recourse to the security.

KAYE JA:

On 25 November 2014, the applicant, Dedert Corporation, entered into a written contract with the respondent, United Dalby Bio Refinery Pty Ltd, to design, construct, supply and install a Swiss Combi ecoDry system at the respondent’s refinery in Dalby, Queensland for a lump sum payment of US$5,423,400. In accordance with the contract, the applicant furnished to the respondent a bank guarantee dated 31 August 2016 issued by Danske Bank Corporation of Copenhagen Denmark (‘Danske Bank’) in favour of the respondent in the sum of US$542,340.

Subsequent to the supply and installation of the system, the respondent alleged that the system was defective in a number of respects, and that the cost of rectification of those defects would be $866,354.24. By letter dated 13 November 2017, the respondent gave the applicant’s solicitors five days’ notice of its intention to call on the bank guarantee in respect of losses which it alleged it had sustained as a consequence of those defects.

In response to that notice, the applicant applied to the Trial Division of this Court for an injunction to restrain the respondent from calling on or otherwise requesting payment under the guarantee. The matter came before a judge of the Commercial Court as a matter of urgency. Having heard argument on 27 November and 29 November, the judge, with commendable expedition, delivered an ex tempore ruling, holding that the applicant was not entitled to the injunction. The applicant now seeks leave to appeal from that decision.

The contract

The contract was constituted by a Formal Instrument of Agreement which incorporated (inter alia) General Conditions of Contract AS 4902-2000 (as amended) (‘the General Conditions’). In those Conditions, the applicant is referred to as ‘the Contractor’, and the respondent is referred to as ‘the Principal’. For the purposes of determining this application, it is necessary to set out a number of the relevant provisions contained in the General Conditions.

By clause 2.1 of the General Conditions, the applicant agreed to carry out and complete the works under the contract (‘WUC’) in accordance with the contract. By cl 2.2(a) the applicant gave a number of warranties, including that its personnel would exercise due skill, care and diligence in carrying out the WUC, that it would carry out and complete its design obligations in accordance with the respondent’s project requirements and engineering requirements, and that the WUC, when completed, would be free from defects with the exception of minor defects and would be fit for the purpose stated in the respondent’s project requirements.

Clause 20 of the General Conditions provided for the appointment of a Superintendent who would be responsible for payment certification and independent assessment functions under the contract. Clause 29.3 provided that if the Superintendent became aware of work done by the applicant which did not comply with the contract, the Superintendent shall as soon as practicable give the applicant written details. It further provided that if the subject work had not been rectified, the Superintendent may direct the applicant to carry out requisite rectification works, and that if the applicant failed to comply with that direction, and the failure had not been made good within eight days after the applicant received written notice from the Superintendent that the respondent intended to have the subject work rectified:

The Principal may have that work so rectified and the Superintendent shall certify the cost incurred as monies due from the Contractor to the Principal.
The Contractor acknowledges that is (sic) will have sufficiently qualified local personnel available to rectify any defects during the defects liability period.

Clause 37.1 provided that the 12 month defects liability period would commence on the date of practical completion. It then provided that the applicant would carry out rectification at times and in a manner as was reasonably possible. Clause 37.1 then relevantly provided:

During the defects liability period, the Superintendent may give the Contractor a direction to rectify a defect which:
(a)shall identify the defect and the date for completion of its rectification; and
(b)may state a date for commencement of the rectification and whether there shall be a separate defects liability period therefore …

If the rectification is not commenced or completed by the stated dates, the Principal may have the rectification carried out by others but without prejudice to any other rights and remedies the Principal may have. The cost thereby incurred shall be certified by the Superintendent as monies due and payable to the Principal.

Clause 39.1 provided that the applicant would be entitled to claim progress payments in accordance with the formula set out in that clause. Clause 39.2 provided that the Superintendent would, within 14 days after receiving a progress claim, issue a progress certificate evidencing the superintendent’s opinion of the monies due from the respondent to the applicant, and a certificate evidencing the superintendent’s assessment of retention monies and monies due from the applicant to the respondent pursuant to the contract.

Clause 39.7 and cl 39.9 stated as follows:

39.7 Set off
The Principal may set-off any amount due and payable by the Contractor to the Principal against any amount that the Principal owes the Contractor under the Contract.
If the moneys payable to the Contractor are insufficient to discharge the liability of the Contractor to pay such sum to the Principal, the Principal may have recourse to the security provided by the Contractor.

39.9 Recourse for unpaid moneys
Where, within the time provided by the Contract, the Contractor fails to pay the Principal an amount due and payable under the Contract, the Principal may have recourse to security under the Contract and any deficiency remaining may be recovered by the Principal as a debt due and payable from the Contractor to the Principal.

Clause 43 made provision for the notification of claims under the contract. Clause 43.1 provided that the ‘prescribed notice’ is a written notice of the general basis and quantum of a claim. Clause 43.3 provided:

Within 56 days of receipt of the prescribed notice the Superintendent shall assess the claim and notify the parties in writing of the decision. Unless a party within a further 28 days of such notification gives a notice of dispute under sub-clause 45.1 which includes such decision, the Superintendent shall certify the amount of that assessment to be monies then due and payable.

Clause 45.1 relevantly provided that if a dispute between the parties arises in connection with the contract or the subject of the contract, then either party shall give the other and the Superintendent a written notice of dispute. Clause 45.2 provided that if the dispute has not been resolved within 28 days of service of the notice, the dispute shall be referred to arbitration.

The security guarantee was furnished by the applicant to the respondent pursuant to cl 5 of the contract, which provided:

5. SECURITY
5.1 Provision
Security shall be provided in accordance with Item 14 or 15. All delivered security, other than cash or retention moneys, shall be transferred in escrow.

5.2 Recourse
Security shall be subject to recourse by a party who remains unpaid after the time for payment where at least 5 days have elapsed since that party notified the other party of intention to have recourse.
…

5.4 Reduction and release
Within 14 days of the date of practical completion, the Principal will release and return letter of credit 1 (see item 14) to the Contractor.
Upon payment of any amount of the Lump Sum Amount to the Contractor, the Contractor’s entitlement to security shall be reduced by the percentage or amount In Item l5(d) and the reduction shall be released and returned within 14 days to the Principal.
A party’s entitlement otherwise to security shall cease 14 days after final certificate. Upon a party's entitlement to security ceasing, that party shall release and return forthwith the security to the other party.

Clause 1.1 of the contract defined security in the following terms:

Security means:
(a) cash;
(b) retention moneys;
(c)bonds or inscribed stock or their equivalent issued by a national, state or territory government;
(d)interest bearing deposit in a bank carrying on business at the place stated in Item 9(c);
(e)an approved unconditional undertaking (the form in Annexure Part B is approved) or an approved performance undertaking given by an approved financial institution or insurance company; or

(f) other form approved by the party having the benefit of the security.

It should be noted that the contract did not contain, or have appended to it, any form of approved unconditional undertaking referred to in sub-paragraph (e) of that definition.

The respondent relied on cl 46.3 of the General Conditions in support of its submissions that the respondent was entitled to have recourse to security guarantee in respect of its claim against the applicant. That clause stated:

46.3Security held under the QBCC Act after Practical Completion
The parties agree that to the extent that the Contract provides for the total of:
(a) all retention monies (if any) withheld by the Principal; and
(b) all security held by the Principal,

to exceed 2.5% of the contact price for the Contract (which under the QBCC Act includes adjustments for variations) after practical completion of the Works has been reached, the amount of the excess does not relate to the need to correct defects in the Works under the Contract identified in the defects liability period, but relates to the recovery by the Principal of any monies that may become payable to the Principal by the Contractor under or in connection with the Contract, the Contractor’s performance of the Contract or any breach of the Contract by the Contractor.

The security

As mentioned, the security, that was provided by the applicant, constituted a Bank Guarantee issued by Danske Bank in favour of the respondent, by which the bank undertook to pay to the respondent any amount up to US$542,340, upon a request for payment by the respondent confirming that the applicant had not complied with its contractual obligations under the contract, that no less than 14 days had elapsed since the respondent notified the applicant of its failure, and that as a consequence the respondent had suffered a loss equalling the amount requested under the guarantee. The guarantee was initially expressed to expire on 3 August 2017. It was subsequently extended, first to 3 December, and again to 22 December, in order to preserve the subject matter of the dispute in this case.

The dispute

Pursuant to cl 5.2 of the contract, and the requirement of the bank guarantee, the respondent gave notice to the applicant of its intention to call on the bank guarantee by a letter dated 13 November 2017. Having referred to the contract and the guarantee, the letter stated:

United’s (the respondent’s) position is that Dedert has not complied with its obligations under the Contract and that United has suffered direct losses equalling or exceeding the amount of the bank guarantee in respect of the matters set out below.

The letter then summarised the claims which the respondent asserted against the applicant, relating to a number of defects which it alleged in respect of the design and construction of the drying system. It concluded by stating:

Accordingly, United will call on the Bank Guarantee at the expiry of the relevant notice periods in accordance with its rights under the Contract.

The principal submission, advanced on behalf of the applicant, before the judge, and on this application, was that the respondent was not entitled to have recourse to the guarantee under cl 5.2, because the claims made by the respondent, which it seeks to satisfy from the guarantee, are not in respect of an amount which ‘remain[ed] unpaid after the time for payment [had] elapsed’.

On the other hand, it was submitted on behalf of the respondent that cl 5.2 did not exclusively govern all the recourse by the respondent to the security. In particular, the respondent relied on cls 39.7, 39.9 and 46.3 of the contract, which, it submitted, had the effect that the contract contemplated recourse to the security by the respondent in respect of amounts which may become payable for breach of contract, but which were not at the time of the claim due and payable by the applicant.

On the hearing of the application before the primary judge, the respondent proffered an undertaking to the effect that any amount paid by the Danske Bank pursuant to the guarantee would be paid directly to the trust account of the respondent’s solicitors to be held on trust for the applicant and the respondent and that such sum could only be paid out or otherwise transferred from the trust account upon resolution of the dispute or by order of the Court or award of any arbitrator presiding over such dispute.

The judge’s reasons

The judge commenced his reasons by noting that the parties had agreed that the usual principles, governing interlocutory applications, were applicable, but that they were to be applied in the context of the provision of security in the form of a performance bond, by which the parties have agreed to allocate risk pending final determination of a dispute. The judge referred to the decision of this Court in Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd,[31] noting that, in that case, the Court expressed the view that a primary judge, hearing an application for an interlocutory injunction in respect of a performance bond, should ordinarily reach a concluded view on any issue of construction of the bond.[32]
[31][2015] VSCA 98 [31], [34] (Osborn and Ferguson JJA), [138] (Kaye JA) (‘Sugar Australia’).
[32]Sugar Australia [2015] VSCA 98 [68].

Having outlined the competing arguments of the parties, the judge concluded as follows:

Taken together and viewed objectively, it seems to me that the parties did not intend to limit recourse to the security solely to circumstances where a ‘party remains unpaid after the time for payment’. Plainly clause 5.2 would engage with respect to certified amounts which remain unpaid. However it does not explicitly exclude amounts reflecting bona fide claims for amounts which may become due from the Contractor to the Principal for breach of contract.
The parties have expressly agreed that security (in excess of 2.5%) relates to recovery of any monies that may become payable to the Principal under or in connection with the Contractor’s performance or breach. If clause 5.2 of the Contract were to be construed narrowly as the Contractor contends (ie only when a party remains unpaid after the time for payment), one of the stated purposes of the security could not be realised.
This Contract contemplates recourse to the security for recovery of amounts which may become payable as well as those which are payable but unpaid. In my view clause 5.2, properly construed is permissive and not exclusive in its operation, it must be construed to allow for the agreed circumstances to which I have just referred.

In reaching that conclusion, the judge distinguished the decision of the Queensland Court of Appeal in RCR O’Donnell Griffin Pty Ltd v Forge Group Power Pty Ltd (rec and mgr appt) (in liq).[33] The judge further considered that he was fortified in his views as to the proper construction of cl 5.2 by the terms of the guarantee issued by Danske Bank. His Honour noted that the ‘trigger’ to payment under the guarantee was not that an amount should remain unpaid after the time for payment; rather the guarantee provided that a call could be made on it upon the respondent’s written confirmation that the applicant had not complied with its contractual obligations.
[33][2016] QCA 214 (‘RCR O’Donnell Griffin’).

Taking those matters into account, the judge considered that the commercial purpose of the guarantee was as a risk allocation device pending resolution of all disputes. Accordingly, his Honour was not satisfied that the applicant had established that there was a serious issue to be tried as to whether the respondent was entitled to have recourse to the bank guarantee. The judge further held that the balance of convenience favoured the refusal of an injunction, and accordingly he dismissed the application.

Proposed grounds of appeal

The applicant relies on three proposed grounds of appeal, which may be summarised as follows:

(1)The judge erred in law in construing the contract to mean that the negative stipulation in cl 5.2 (that recourse was permitted ‘where (a party) remains unpaid after the time of payment’) did not preclude the respondent from having recourse to the bank guarantee where it had a claim for unliquidated damages for breach of contract.
(2)The judge erred by:
(a)construing cl 46.3 of the contract as constituting a stand-alone right of recourse to the bank guarantee;
(b)ruling that cl 46.3 supported a conclusion that the contract permitted recourse for claims which may become due for unliquidated damages for breach of contract.

(3)The judge erred in using the terms of the bank guarantee to construe the terms of the contract.

Grounds 1 and 2 — submissions

Grounds 1 and 2 can be conveniently considered together.

In support of ground 1, senior counsel for the applicant submitted that the judge erred in ruling that the stipulation in cl 5.2 (that recourse to the guarantee was permitted where the respondent ‘remains unpaid after the time for payment …’) did not preclude the respondent from having recourse to the bank guarantee in circumstances, where that stipulation in cl 5.2 had not been satisfied. Counsel noted that the other provisions of the contract, cl 39.7, and cl 39.9, that conferred an express right of recourse to the security, conditioned that right upon monies being ‘due and payable’ by the applicant to the respondent. Counsel further noted that there were various mechanisms prescribed by the contract, which stipulated the circumstances in which monies become due and payable under the contract, namely, cls 29.3, 32.8, 36.7, 36.9, 37.1 and 39.4. By contrast, cls 43 and 45, had the effect that where the Superintendent has assessed a claim, the amount assessed does not become due and payable, where a notice of dispute has been served, and the dispute has been referred to arbitration. Thus, counsel submitted, cl 5.2 of the contract (and similarly cls 39.7 and 39.9) do not provide recourse to the security where the respondent has made a claim for unliquidated damages for breach of contract, which has not been the subject of certification or adjudication.

In that respect, counsel submitted that the respondent’s letter dated 13 November 2017 did not allege that an amount was due and payable, but was unpaid, under the contract, or that the time for payment had passed. Rather, at most, that letter asserted a potential claim by the respondent for unliquidated damages for breach of the contract. As such, the claim alleged in the letter did not come within the scope of cl 5.2.

Counsel for the applicant acknowledged that, as a result of the construction contended for on behalf of the applicant, a claim for unliquidated damages on behalf of the respondent might ultimately not be secured by the guarantee, where that claim had not been certified, or arbitrated, before the guarantee lapsed 14 days after the final certificate. However, he contended, such an outcome would be no more than a reflection of the specific provision made by the parties in the contract as to the circumstances in which recourse might be had to the security under cl 5.2, and of the period, specified in the contract, during which the security was to remain operable.

Counsel further submitted that the decision of the Court of Appeal of Queensland in RCR O’Donnell Griffin supported the conclusion that the respondent was not entitled to have recourse to the bank guarantee. He noted that, in that case, the Court of Appeal held that the contract, which contained a clause (also cl 5.2) in the identical terms to cl 5.2 in the contract in this case, did not provide recourse to the security in question, unless the Principal in that case was able to establish that money was due and unpaid by the Contractor to it. Counsel submitted that the relevant terms of the contract in that case are not distinguishable from the contract in this case, and that therefore this Court should follow that decision.

In support of ground 2, counsel for the applicant submitted that the judge erred in concluding that the effect of cl 46.3 of the contract was that the parties did not intend to limit recourse to the security solely to circumstances where a party remained unpaid after the time for payment. Counsel contended that, in effect, the judge treated cl 46.3 as providing a ‘stand alone’ right of recourse to the respondent to the security. He submitted that, properly construed, cl 46.3 did not, of itself, provide such recourse to the security. Rather, it was included in the contract to address the provisions of the Queensland Building Construction Commission Act 1991 (‘QBCC Act’). Section 67N(1) of that Act imposes a statutory condition on a building contract to the effect that, after practical completion, the total value of all securities given and still held ‘is not to be more than 2.5% of the contract price’. Section 67N(2) provides an exception to that prohibition, namely, that the 2.5% limitation does not apply to the extent that the securities do not relate to the need to correct defects, that have been identified in the defects liability period under the contract. In the present case, the contract provided for security after practical completion that amounted to 10% of the contract price. It was submitted, cl 46.3 was designed to ensure that the security, that was held after practical completion, did not contravene s 67N(1), and it did not, of itself, provide to the respondent a discrete right of recourse to the security.

Counsel for the applicant further contended that if the contract did allow recourse by the respondent to the security, in respect of the claim by the respondent for unliquidated damages, it was ineffective by virtue of s 67E and s 67J of the QBCC Act. Section 67J(1) of the Act (which came within Division 2) provided that a contracting party for a building contract may use a security or retention amount to obtain an ‘amount owed’ under the contract, if the contracting party has given notice in writing to the other party advising its proposed use and of the amount owed. Section 67J(5) defined ‘amount owed’ to mean an amount under the contract that is a ‘debt due’ from the contracted party to the contracting party. Section 67E(3) provided that a building contract is unenforceable against a contracted party to the extent that the contract provides for retention amounts or security in a way that is inconsistent with a condition to which the contract is subject under div 2. Thus, it was submitted, if the contract provided for recourse to the security in respect of a claim for unliquidated damages (as distinct from a ‘debt due’) under the contract, it was inconsistent with s 67J(1) of the Act, and thus ineffective. In support of that proposition, counsel relied on the decision of the Queensland Court of Appeal in Multiplex Limited v Qantas Airways Limited[34] and the decision of Martin J in Beyfield Pty Ltd v Northbuild Construction Sunshine Coast Pty Ltd.[35]
[34][2006] QCA 337 [34]–[35] (Keane JA).
[35][2014] QSC 12 [40]–[41].

In response, senior counsel for the respondent commenced his submissions by noting that, if the interpretation of the contract, contended for on behalf of the applicant, is correct, the bank guarantee could expire leaving the respondent with no recourse to any security for claims made by it during the term of the security, but which had not yet been quantified or adjudicated within 14 days after final certificate. He submitted that such a construction of the contract was inconsistent with the commercial purpose of the bank guarantee, and that it had been rejected by the Court of Appeal in Bachmann Pty Ltd v BHP Power New Zealand Ltd.[36] In particular, counsel noted that cl 39.7 of the contract, which is concerned with the right of set off under the contract, is in similar terms to the provision in the contract in Bachmann, which Brooking JA considered as significant in concluding that the contract, in that case, entitled the purchaser to have recourse to the security where it asserted a bona fide claim for damages against the supplier.
[36][1999] 1 VR 420 (‘Bachmann’).

Counsel for the respondent further submitted that the construction of the contract, contended for on behalf of the applicant, would produce anomalous and arbitrary consequences which could not have been intended by the parties. In particular, if, in order to have recourse to the security, the respondent were required to establish that there were monies there and then due and payable to it by the applicant, the respondent’s rights to recourse to the security could be frustrated, in any claim for damages by it, by the applicant giving a notice of dispute under cl 45.1 of the contract. Counsel submitted that such a construction of the contract would be inconsistent with, and frustrate, the underlying commercial purpose of the security guarantee, namely, to provide security to the respondent for claims by it against the applicant under the contract.

In response to ground 2, counsel for the respondent submitted that, contrary to the contention of the applicant, the judge did not regard cl 46.3 of the contract as providing a free standing right of access to the security. Rather, he contended, the judge, correctly, regarded cl 46.3 as reflecting a contractual intention by the parties that the security remain available, after practical completion had been reached, in respect of monies which may become payable by the applicant to the respondent, but which were not then due and payable.

Counsel further noted that the applicant’s submission, concerning the effect of s 67J of the QBCC Act, had not been relied on by the applicant before the primary judge. He submitted that, in any event, that provision did not operate to affect the applicant’s right of recourse to the security. In particular, s67J of the Act only applied to an amount ‘owed’, that is, a debt due under the contract, and therefore it did not apply to amounts that were claimed to be owing. Further, counsel submitted that, in any event, if cl 46.3 were unenforceable pursuant to s 67J, that would not affect the construction of the contract in this case.

Finally, counsel submitted that if cl 5.2 operated to confine the applicant’s rights of recourse to the security to monies which remained unpaid after the time for payment, the monies claimed by the respondent against the applicant, in its letter of 13 November 2017, came within that clause. It was submitted that notwithstanding that the claim, articulated in that letter, was for unliquidated damages, it was based on a cause of action that had accrued at that time. Thus, it was submitted, the monies, claimed in the letter, remained unpaid in respect of that cause of action, and so came within the ambit of cl 5.2 of the contract.

Grounds 1 and 2 — analysis and conclusion

The application before the primary judge was for an interlocutory injunction to restrain the respondent from calling on, or otherwise requesting payment under, the guarantee. In order to establish an entitlement to such an injunction, the applicant would be required to demonstrate, first, that there was a serious issue to be tried, and, secondly, that the balance of convenience favoured the grant of the interlocutory relief sought by it. However, as mentioned, the judge determined the application by reaching a concluded view as to the construction of the contract between the parties. In doing so, his Honour applied the principle stated in a number of authorities, including Fletcher Construction Australia Limited v Varnsdorf Pty Ltd[37] and Sugar Australia,[38] that, ordinarily, a court should determine the construction of the contract, if determination of that issue is necessary to a step to a conclusion whether an applicant is entitled to an injunction to restrain recourse to a security provided under a building contract.
[37][1998] 3 VR 812, 821 (Charles JA) (‘Fletcher Construction’).
[38][2015] VSCA 98 [35], [36], [68] (Osborn and Ferguson JJA), [111] (Kaye JA).

It was common ground on this application that the judge was correct to adopt such an approach to the construction of the contract. While, the issue of construction in this case is not without its difficulties, I also consider that the judge was correct to decide the application before him by reaching a concluded view as to the meaning of the contract. There was no suggestion, before the trial judge or on this application, that there were any background circumstances, which are not the subject of evidence, and which might affect the correct construction of the relevant terms of the contract. The determination of the application for an interlocutory injunction on behalf of the applicant would potentially be dispositive of at least part of the subject matter of the proceeding. If the interlocutory injunction were granted, it would be determinative of the extent of the security afforded by the guarantee, and the question as to which party should be out of pocket pending resolution of any dispute under the contract. On the other hand, if, as occurred in this case, the application for interlocutory injunction were refused on the basis of the undertaking proffered by the respondent, such a resolution would extend the duration of the security provided by the guarantee until after the determination of the substantive dispute between the parties under the contract. It would also affect, at least in part, the allocation of the risk of which party should be out of pocket pending determination of that dispute.

For those reasons, I consider that the judge was correct to determine the application for an interlocutory injunction by reaching a concluded view as to the construction of the contract. The same considerations apply to the determination of this application, so that, like the trial judge, this Court should also reach a concluded view as to the meaning and effect of the relevant terms of the contract. Indeed, I did not understand the parties, on this application, to have contended that the Court should do otherwise. If this Court were not to reach a concluded view as to the meaning and effect of the relevant terms of the contract, then the substantive issue, which is the subject of this proceeding, would return to the Trial Division for final determination. The parties, and the trial judge, would be left in the incongruous position of being faced with a decision of the primary judge based on his Honour’s concluded view as to the meaning and effect of the contract, together with the refusal of this Court to decide whether that construction by his Honour of the contract was correct. For those reasons, I consider that this Court should determine the application before it by reaching its own concluded view as to the correct construction of the contract between the parties.

The principles, relating to the grant of an injunction to restrain a party from exercising recourse to a commercial guarantee, have been discussed in a number of authorities, and were outlined, at some length, in the decision of the Full Court of the Federal Court in Clough Engineering Limited v Oil & Natural Gas Corporation Limited.[39] As stated by the Full Court in that case, subject to three principal exceptions, a court will not ordinarily enjoin a party from recourse to a performance guarantee. Those exceptions are, first, a court will enjoin a party, in whose favour the guarantee has been given, from acting fraudulently; secondly, the court will enjoin such a party from acting unconscionably; and, thirdly, the court will restrain such a party from acting in breach of a contractual promise made by it not to call on the guarantee in particular circumstances.[40]
[39](2008) 249 ALR 458, esp at 477–80 [75]–[85] (French, Jacobsen and Graham JJ) (‘Clough Engineering’).
[40]Clough Engineering (2008) 249 ALR 458, 478 [77]; Sugar Australia [2015] VSCA 98 [138].

In construing the rights and liabilities of the parties under the contract, it is necessary to have reference to the precise terms in which the relevant clauses of the contract are expressed, their context in the contract as a whole, and the purpose of the contract. In undertaking that exercise, in respect of a commercial contract, it is necessary to determine the meaning of the terms of the contract, that are in issue, by reference to what a reasonable businessperson would have understood them to mean.[41] In a case such as this, the commercial background to the contract informs the construction of a security clause in it. In particular, it is recognised that the court should not too readily favour a construction, which is inconsistent with an agreed allocation of risk as to who is to be out of pocket pending resolution of the dispute about the breach that is alleged.[42]
[41]Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104, 116 [46]–[47] (French CJ, Nettle and Gordon JJ); Electricity Generation Corporation v Woodside Energy Limited (2014) 251 CLR 640, 656–7 [34] (French CJ, Hayne, Crennan and Kiefel JJ).
[42]Clough Engineering (2008) 249 ALR 458, 479 [82]; Bachmann Pty Ltd v BHP Power New Zealand Limited [1999] 1 VR 420, 436–7 [53] (Brooking JA); Sugar Australia [138].

In Fletcher Construction, Callaway JA described the appropriate approach in the following terms:

There are broadly two reasons why the beneficiary may have stipulated for a guarantee. One is to provide security. If it has a valid claim and there are difficulties about recovering from the party in default, it has recourse against the bank. The second reason, which is additional to the first, is to allocate the risk as to who shall be out of pocket pending resolution of a dispute. The beneficiary is then able to call upon the guarantee even if it turns out, in the end, that the other party was not in default … It is a question of construction of the underlying contract whether the guarantee is provided solely by way of security or also as a risk allocation device. Remembering that we are speaking of guarantees in the sense of standby letters of credit, performance bonds, guarantees in lieu of retention monies 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.[43]

[43]Fletcher Construction [1998] 3 VR 812, 826–7; see also 821 (Charles JA).

The first question, then, is whether the contract contained a relevant qualification or restriction on the right of the respondent to have recourse to the guarantee. In my view, it is plain that the contract does contain such a qualification. Apart from cl 39.7 and cl 39.9, which do not apply in this case, the only other provision, contained in the contract, entitling the respondent to have recourse to the security, is cl 5.2. That clause contained the express prescription that recourse is permitted where a party ‘remains unpaid after the time of payment’. That requirement constituted a contractual qualification on the respondent’s powers in relation to the exercise of the security. In terms of the authorities, it was an implied negative stipulation in the contract that the respondent would not invoke recourse to the security in the absence of there being an account ‘unpaid’ by the applicant to the respondent ‘after the time for payment’.

That view is supported by the approach taken by Brooking JA in Bachmann. I shall return, later in these reasons, to that case in more detail. However, the relevant clause in the contract in that case (cl 5.5) provided that a party should not have access to the security until that party became ‘entitled to exercise a right’ under the contract in respect of the security. Brooking JA considered that, thus expressed, the clause contained a contractual qualification to the purchaser’s powers to have recourse to the security.[44]
[44]Bachmann [1999] 1 VR 420, 429 [28], 430 [30].

The question is whether that qualification, in cl 5.2 of the contract, precludes the respondent from having recourse to the security in respect of the claim for damages asserted by it in its letter dated 13 November.

As mentioned, the contract contains three clauses which specifically provide for recourse by the respondent to the security, namely, cl 5.2, cl 39.7 and cl 39.9. The latter two clauses are only engaged where, pursuant to their terms, an amount has been certified by the Superintendent, or is otherwise provided by the contract, to be ‘due and payable’ by the Contractor to the Principal. It is not contended that, in this case, the damages, referred to in the letter of 13 November, are ‘due and payable’ in those terms. The critical question, then, is whether, under cl 5.2, the losses asserted by the respondent, in its letter dated 13 November, constitute monies which ‘remain unpaid after the time for payment’. That phrase, in cl 5.2, must of course be construed according to the terms in which it is expressed, taking into account its context in the contract, and the commercial purpose of the provisions in the contract relating to the security.

As counsel for the applicant has pointed out, the contract contains a number of terms specifying the circumstances in which monies might be ‘due and payable’ by the respondent to the applicant. Clause 29.3, referred to above, provides for the Superintendent to certify the cost of rectification works, which the Contractor has failed to undertake, as ‘monies due from the Contractor to the Principal’. Clause 32.8 provides that where the works completed do not satisfy the Performance Guarantee, and the Contractor has not rectified the defect, the Principal may direct the Contractor to pay performance liquidated damages, which (pursuant to cl 32.8(b)) will be a ‘debt due’ from the Contractor to the Principal. Clause 36.7 and cl 36.9 provide for the certification by the Superintendent, as ‘due and payable’ to the Principal, of delay liquidated damages, if the works under the contract do not reach practical completion by the date for practical completion. Clause 37.1 (set out above) provides for the cost of works, which the Contractor fails to carry out and complete in the defects liability period, to be certified as ‘monies due and payable to the Principal’. Clause 39.4 provides that, within 42 days after the expiry of the last defects liability period, the Superintendent shall issue a final certificate evidencing the monies ‘finally due and payable’ between the Contractor and the Principal.

Ordinarily, according to the plain usage of language, monies would not be understood to remain ‘unpaid after the time for payment’, unless those monies have already become due and payable. Such a conclusion is axiomatic. That meaning, of the critical phrase in cl 5.2, is supported by the contractual context to which I have just referred, by which the contract, in specific terms, has identified the circumstances in which amounts are ‘due and payable’ by one party to the other under the contract.[45]
[45]cf Tomkins Commercial and Industrial Builders Pty Ltd v Majella Towers One Pty Ltd [2017] QSC 202 [100]–[102] (Brown J).

As counsel for the applicant has pointed out, the contract, so construed, would have the effect, not only of providing security, but also, in specified circumstances, of allocating the risk as to which party should be out of pocket pending resolution of a dispute. That latter purpose is reflected, particularly, in cl 39.7 and cl 39.9, which specify the right of recourse by the Principal to the security in respect of any amount stated in the final certificate issued by the Superintendent. The fact that the contract allocated, but confined, the risk to those circumstances, adds weight to the construction of cl 5.2 contended for on behalf of the applicant.

As mentioned, the judge considered that cl 46.3, when construed with cl 5.2, had the effect that the contract did not explicitly preclude recourse to the security in respect of bona fide claims by the respondent for amounts which may become due from the Contractor to the Principal for breach of contract. Thus, his Honour came to the conclusion that cl 5.2, properly construed, was ‘permissive’ and not exclusive in its operation.

As noted by counsel for the applicant, cl 46.3 is directed to the limitation, imposed by s 67N of the QBCC Act, on the amount of permitted security for building contracts after practical completion. Section 67N(1) provides that a building contract is subject to a condition that at any time after practical completion of the building work is reached, the total value of all retention amounts and securities under the contract are not to be more than 2.5% of the contract price. The building contract in this case falls within that sub-section, as the security provided by the guarantee is for 10% of the contract price. Section 67N(2) provides that sub-section (1) does not apply to retention amounts or securities, to the extent that they ‘do not relate to the need to correct defects, identified in the defects liability period for the contract, in the building work for the contract’.

Clause 46.3 of the contract was plainly directed to bring the contract within the exception provided in sub-section (2), by providing that the security, held after practical completion, does not relate to the need to correct defects in the works identified in the defects liability period, but relates to the recovery by the Principal of any monies that may become otherwise payable to the Principal by the Contractor. In that way, the contract enabled the security to be efficacious, during the period between practical completion and the date fixed for expiration of the security (14 days after final certificate), albeit that, by the terms of s 67N, and cl 46.3, the respondent could only have recourse to the security in respect of claims, that do not concern the correction of defects, and that are identified in the defects liability period. Thus, cl 46.3 did not reflect or contain a contractual intention to provide recourse to the security for claims for unliquidated damages during that period. It did not provide an alternative basis upon which recourse might be had to the security, or have the effect that cl 5.2 should be construed in the manner contended for on behalf of the respondent.

Counsel for the respondent submitted that the construction of cl 5.2, contended for on behalf of the applicant, would have the effect that any claim by the respondent for unliquidated damages would not be secured, unless that claim was certified by the Superintendent pursuant to cl 43.3, and no notice of dispute had been served by the applicant under cl 45.1, before the expiration of the security. It was submitted that, if the contract were interpreted in that way, the applicant could easily frustrate the right of the respondent to have recourse to the security, in respect of any claim by the applicant for unliquidated damages, by giving a notice of dispute in respect of any claim by the respondent for unliquidated damages. Counsel contended that such an anomalous conclusion could not have been contemplated by the parties.

That argument, on behalf of the respondent, is not without force. However, by its plain terms, cl 5.4 limited the duration of the security to 14 days after final certificate (that is, to 42 days after the expiration of the defects liability period, which in turn was 12 months after practical completion). On any view, a claim for unliquidated damages, in respect of a defect in the works that is discovered after that period, would not be covered by the security. By providing, in cl 5.2, cl 39.7 and cl 39.9, for the circumstances in which the security might be subject to recourse by the respondent, the contract contemplated that there might be claims for unliquidated damages which were not secured, because no amount had become ‘due and payable’ in respect of those claims before the time at which the security was due to expire.

Counsel for the respondent also relied on cl 1.1 of the contract, which defined security to mean (other than in the case of cash, retention monies, bonds or interest bearing deposit) an ‘approved unconditional undertaking’ or ‘an approved performance undertaking’ given by an approved financial institutional insurance company. In Fletcher Construction, Charles JA[46] and in Bachmann, Brooking JA[47] each considered that it was relevant that the contract specified for the provision by the contractor of an ‘unconditional’ undertaking. Certainly, that provision, in the contract, is relevant in determining the intentions of the parties. However, it did not have the effect that the contract provided for unconditional recourse by the respondent to the security. Rather, properly construed, it had the effect that, where the contract did not preclude the respondent from having recourse to the security, the undertaking or guarantee should be unconditional in its form and effect.
[46]Fletcher Construction [1998] 3 VR 812, 828.
[47]Bachmann [1999] 1 VR 420, 435 [49].

Finally, counsel for the respondent contended that if (apart from cl 39.7 and cl 39.9) cl 5.2 is the sole means by which the respondent might have recourse to the security, the losses which it alleged it had sustained, in its letter dated 13 November 2017, constituted a claim which ‘remains unpaid after the time for payment’, so as to come within the ambit of cl 5.2. It was contended that the respondent’s letter of 13 November constituted a claim based on a cause of action, for damages for breach of contract, which had accrued. Accordingly, it was submitted, the damages, claimed in that letter, relevantly remained unpaid after the time for payment of them, so that the respondent, pursuant to cl 5.2, was entitled to have recourse to the security in respect of those monies.

That contention cannot be sustained. To say the least, it is highly artificial to postulate that a claim for unliquidated damages, which has not been adjudicated, of its own force has the effect that those damages constituted money which ‘remains unpaid after the time for payment’. As I have stated, according to ordinary usage, monies may be understood to remain ‘unpaid after the time for payment’, where such monies have been due and payable, but have not been paid. An assertion, by the respondent, that the applicant is liable for unliquidated damages for losses sustained as a result of a breach of contract, could not, in any sense, be characterised as having the effect that monies (in respect of that unadjudicated claim) remain unpaid after the time for payment.

Further, and in any event, the letter by the respondent to the applicant’s solicitors dated 13 November 2017 could not be characterised as a claim for the payment of monies which, if unpaid, remained ‘unpaid after the time for payment’. The letter itself did not make a demand for payment of any sum of money; rather, by its terms, it purported to be a notice by the respondent to the applicant of its intention to call on the bank guarantee. Even if the letter could be construed as containing a claim for the payment of damages, it did not specify the quantum of the losses which it sought to claim from the applicant, nor the time at which those damages should be paid. In the absence of any such specification, it could not be concluded that there was any money which remained ‘unpaid after the time for payment’ for the purposes of cl 5.2.

For those reasons, applying ordinary principles of contractual interpretation, I have reached the conclusion that, on its correct construction, the contract contained a qualification to the right of the respondent to have recourse to the security, which qualification has not been satisfied on the facts of this case.

That conclusion is supported by the decision of the Court of Appeal of Queensland in RCR O’Donnell Griffin. In that case, the appellant entered into a contract with the respondent to perform electrical work in the construction of a power station. The appellant provided two unconditional bank guarantees. Clause 5 of the subcontract between the parties was in the same terms as cl 5 in this case. The judge held that the respondent was entitled to recourse to the security, by making a bona fide claim on the appellant that there was money due to be paid to it by the appellant. On appeal, McMurdo JA (with whom Applegarth J agreed), having referred (inter alia) to the decision of this Court in Fletcher Construction, and the decision of the Full Court of the Federal Court in Clough Engineering, concluded that the primary judge’s interpretation of cl 5.2 was incorrect, and that the security, provided under cl 5, could only be accessed if in fact money remained unpaid by the appellant to the respondent. His Honour expressed that conclusion in the following terms:

By cl 5.2 of the Subcontract in this case, the security was subject to recourse ‘where [the Principal] remains unpaid after the time for payment’. On the ordinary meaning of those words, the precondition to recourse to the security was the fact of money being unpaid to the Principal. Clause 5.2 was not in terms which referred to a belief, or grounds for a belief, that money remained unpaid. Because recourse to the security was permitted only where in fact money remained unpaid, in my view it was necessarily implied that recourse was not permitted, and that the Principal should not attempt to have recourse to the security, where there was not money which remained unpaid to it. There was thereby a negative stipulation which could be the basis for an injunction restraining Forge from making demand on the bank guarantees. In my view, the unambiguous terms of cl 5.2 should not be construed as they were by the primary judge.

Caution should, of course, be exercised in relying on decisions in which the terms of the contract, under consideration, may not be identical to those in the instant case. Nevertheless, it is clear, from the foregoing passage, that McMurdo JA determined the appeal by focussing solely on the precise terms in which cl 5.2 of the contract was expressed. As I stated, that clause was in identical terms to cl 5.2 of the contract in the present case. Accordingly, I do not consider that the decision in RCR O’Donnell Griffin is relevantly distinguishable from the present case. As such, that decision is persuasive support for the construction of cl 5.2 contended for on behalf of the applicant.

Further, I do not consider that the decisions in this Court, in Fletcher Construction and Bachmann, and of the Full Court of the Federal Court in Clough Engineering, are contrary to the conclusion that I have reached considering the correct construction of the contract in this case.

In Fletcher Construction, Varnsdorf, as owner, and Fletcher Construction, as the project manager, entered into a construction agreement by which Fletcher would design, construct and commission a thermal energy and electricity co-generation plant at six hospitals. Varnsdorf made a claim, which was disputed by Fletcher, that Fletcher had not brought the plant at any of the six hospitals to a state of handover by the due date, and that accordingly Fletcher was obliged to pay time damages to it under cl 3.13 of the contract. Specifically, cl 3.13(a) provided that if Fletcher did not reach handover by the date of handover, it must pay time damages at the rate prescribed in an annexure to the contract for every operating day thereafter. Clause 3.13(b) provided that the owner might deduct time damages from any amount due from it to Fletcher under the contract, and if that was insufficient, Fletcher must pay the balance of time damages to the owner within 10 business days of delivery of a notice to Fletcher from the owner ‘demanding payment’. Sub-clause (b) further provided that if Fletcher failed to pay the balance within 10 business days of such a demand, Varnsdorf might have recourse to the security to obtain the balance. Clause 6.6 of the agreement provided that Fletcher was to provide security prescribed in the schedule, which stated that the amount of security was to be $5,000,0000 ‘in the form of an unconditional undertaking to pay in favour of the owner’.

Charles JA concluded that cl 3.13 made provision, not only for security for Varnsdorf in respect of any claim it had for damages, but also for an allocation of the risk, between Fletcher and Varnsdorf, as to which party was to be out of pocket pending the resolution of that claim. His Honour reached that conclusion for three reasons. First, Varnsdorf was entitled, under cl 3.13 to have recourse to the security to obtain payment of any time damages owing to it after it had set off its claim for time damages against any money due from it to Fletcher. Secondly, Charles JA considered that it was of ‘great importance’ that Varnsdorf’s right of security was in the form of an unconditional undertaking to pay in favour of Varnsdorf. Thirdly, cl 3.13(b) gave Varnsdorf the right to deduct time damages, and on its face cl 3.13 provided no qualification to the right of Varnsdorf to call on the security for any balance of time damages owing to it.[48]
[48]Fletcher Construction [1998] 3 VR 812, 821–2; see also at 826–7 (Callaway JA).

In the present case, the respondent submitted that the set off provision, contained in cl 39.7 of the contract, and which entitled the respondent to have recourse to the security for any balance owing to it after such set off, was analogous to cl 3.13(b) of the contract in Fletcher Construction. However, there is a relevant fundamental distinction between, on the one hand, cl 3.13(b) in the Fletcher Construction case, and cl 39.7 in the contract in the present case. In Fletcher Construction, the contract, by cl 3.13(b), entitled Varnsdorf to deduct the prescribed time damages from any amount it owed to Fletcher, and to have access to the security for any balance after such deduction, 10 days after delivering to Fletcher a notice ‘demanding payment’. That is, as Charles JA noted, cl 3.13(b) provided no qualification to the right to Varnsdorf to have recourse to the security, other than that it must first make a demand upon Fletcher for the time damages. By contrast, in the present case, cl 39.7 specifically provided that the right of recourse by the respondent to the security, after any set off, was limited to any amount that was ‘due and payable’ by the applicant to the respondent. As discussed, the phrase ‘due and payable’ in the context of the contract has a particular meaning, namely, an amount certified by the Superintendent, or otherwise specifically provided by the contract, to be due and payable by the applicant to the respondent. In that way, the critical clause in issue in Fletcher Construction was relevantly different, and distinguishable from, cl 39.7 of the contract in the present case.

That brings me to the decision of the Court of Appeal in Bachmann, on which the respondent placed substantial reliance on this application. In that case, the appellant agreed to design, manufacture, supply and commission steel manufacturing equipment for the respondent’s Steam Kiln Co-Generation Project near Auckland. Clause 5.1 of the contract stated that security and retention monies under the contract were for the purposes of ensuring ‘the due and proper performance of the contract’. Clause 5.3 provided that the security shall be in the form of cash, bonds, inscribed stock, an interest bearing deposit or ‘an approved unconditional undertaking’ given by an approved financial institution. Clause 5.3 further provided that the form of an approved unconditional undertaking was attached to the General Conditions.

The approved form of unconditional undertaking, attached to the General Conditions, in accordance with cl 5.3, was as follows:

… (the financial institution) unconditionally undertakes to pay on demand any sum or sums which from time to time may be demanded by the purchaser to a maximum aggregate sum of $ .
…
Should the financial institution be notified, in writing, purporting to be signed for and on behalf of the purchaser that the purchaser desires payment to be made of the whole or any part or parts of the sum, it is unconditionally agreed that the financial institution will make the payment or payments to the purchaser forthwith without reference to the supplier and notwithstanding any notice given by the supplier not to pay same.

Clause 5.5 of the contract in Bachmann provided that a party shall not convert into money security that does not consist of money ‘… until the party becomes entitled to exercise a right under the contract in respect of the security …’. The only provision of the contract, which entitled the purchaser to exercise a right in respect of the security, was cl 22.4 of the General Conditions, which provided:

The purchaser may deduct from monies otherwise due to the supplier any monies due from the supplier to the purchaser and if those monies are insufficient the purchaser can have recourse to the security under the contract.

As mentioned, Brooking JA (with whom Tadgell and Ormiston JJA agreed) commenced by noting that cl 5.5 contained a contractual qualification on the right of the purchaser to have recourse to the security, namely, that the purchaser should not convert into money the security until the purchaser ‘becomes entitled to exercise a right under the contract’.[49]
[49]Bachmann [1999] 1 VR 420, 430 [30].

Brooking JA noted the competing positions taken by the parties. On the one hand, the purchaser contended that it was only required to make a bona fide claim to be entitled to exercise a right under the contract in respect of the security. On the other hand, the supplier contended that something more was required. Brooking JA observed that it was not clear what that ‘something more’ was.[50] In particular, he noted the difficulties which would arise from a construction of cl 5.5 that required the purchaser, in the absence of an adjudication, to demonstrate an actual entitlement to exercise a right under the contract. His Honour stated:

… if ‘becomes entitled’ looks only to the effect of events which have occurred in the light of relevant provisions of the contract and any relevant rules or principles of law, so that, once the ‘necessary’ events have occurred, the entitlement exists, notwithstanding that it has not been recognised in any decision of a court or arbitrator, then the practical difficulty arises that in most cases, as a result of a dispute about the facts and possibly about the effect of other provisions of the contract and even about the general law, one side will be asserting and the other will be denying that in the events that have happened entitlement does exist.[51]

[50]Ibid 430 [31].

[51]Ibid 431–2 [34].

After considering a number of relevant authorities, Brooking JA concluded:

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 cl. 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 J.A. 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 purchaser in some such sense as actually or indisputably due. I would treat cll. 5.5 and 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.
The fact that one of the forms of security recognised by cl. 5.3, when regard is had to the approved undertaking which is attached, is cast in the now familiar form of an unconditional promise to pay on demand without reference to the supplier and notwithstanding any notice by it not to pay supports the view that the parties contemplated that it was the supplier who should be out of pocket pending the resolution of any dispute.[52]

[52]Ibid 436–7 [53]–[54].

The foregoing analysis of the judgment of Brooking JA, in Bachmann, reveals that there were three important factors which distinguish the contract in Bachmann from the contract in the present case.

First, and obviously, the relevant conditions of the contract in Bachmann, entitling the purchaser to have recourse to the security in that case, were expressed in different and distinct terms than cl 5.2 in this case. In Bachmann, cl 5.5 and cl 22 of the contract were capable of being construed, in a manner that was workable, to provide recourse to the purchaser to the security where the purchaser had a ‘bona fide claim’ that monies were due to it from the supplier. By contrast, in this case, if a similar approach were adopted to the construction of cl 5.2, it would not assist the respondent in the same way. A construction of cl 5.2, entitling the respondent to have access to the security where the respondent has a ‘bona fide claim’ that monies remained ‘unpaid after the time for payment’ (of those monies), would beg the questions, first, as to what monies ‘remain unpaid’, and, secondly, as to what the time for payment of those monies is.

Secondly, in Bachmann, Brooking JA was substantially exercised by the circumstance that, unless cl 5.5 only required the purchaser to make a bona fide claim, it could readily be rendered unworkable by any dispute raised by the supplier to the claim made by the purchaser. On the other hand, in the present case, as discussed, the contract contained a number of provisions by which monies could be made ‘due and payable’ by the applicant to the respondent in the absence of any adjudication in respect of a claim made by the respondent for that payment. In that way, the requirement in cl 5.2, that the money claimed by the respondent will remain ‘unpaid after the time for payment’, connected with other contractual mechanisms by which money might become due and payable by the applicant to the respondent under the contract.

The third point of distinction between the two cases is that, in Bachmann, one of the forms of security recognised in cl 5.3 of the contract was an approved undertaking in the form of an unconditional promise to pay on demand without reference to the supplier. The contract between the applicant and the respondent does not contain any such corresponding approved form of security. The provision, in Bachmann, of an approved form of security, payable on demand by the purchaser without reference to the supplier, was — as stated by Brooking JA — supportive of the conclusion that the parties contemplated that it was the supplier who should be out of pocket pending the resolution of any dispute between the parties.

In Clough Engineering, the appellant, Clough Engineering, entered into a construction contract with the first respondent, Oil and Natural Gas Corporation Limited (‘ONGC’). Clause 3.3.1 of the contract provided that Clough Engineering should furnish to ONGC an unconditional and irrevocable performance bank guarantee for due performance of the contract. Clause 3.3.3 provided that ONGC should have the right under the guarantee ‘… to invoke the Banker’s guarantee and claim the amount thereunder in event of the Contractor [Clough Engineering] failing to honour any of the commitments entered into under this Contract’.

Importantly, Appendix 3 of the contract set out a proforma for the performance guarantee letter between any relevant bank and ONGC. Clause 2 of that proforma provided:

We … [name of the bank] … do hereby guarantee and undertake to pay immediately on first demand in writing … on breach of contract by contractor without any demur, reservation, contest or protest and/or without any reference to the Contractor. Any such demand made by Company on the Bank by serving a written notice shall be conclusive and binding, without any proof, on the bank as regards the amount due and payable, notwithstanding any dispute(s) pending before any Court, Tribunal, Arbitrator or any other authority and/or any other matter or things whatsoever, as liability under these presents being absolute and unequivocal.

Clough Engineering sought an injunction against ONGC to restrain it from making a demand on the bank. It contended that on the terms of the contract ONGC was not entitled to make the demand by merely asserting that Clough Engineering was in breach of contract. Unsurprisingly, that contention was rejected by the Full Court of the Federal Court and the injunction was refused. In reaching that conclusion, French, Jacobson and Graham JJ stated:

Clough’s obligation in cl 3.3.1 of the contract to furnish a performance guarantee ‘as per proforma’ set out in the appendix, made the terms of the performance guarantee a part of the contractual arrangements between Clough and ONGC. It did not import the terms of the contract into the performance guarantee: see Reed at 166. However, it is almost trite to say that the contractual arrangements between the parties must be considered as whole.
The essential question then is whether, cl 3.3.3 of the contract, when read with cl 2 of the performance guarantee, imports an express or implied negative stipulation in the contract that ONGC would not invoke the security absent actual breach. More particularly, was there an express or implied negative stipulation precluding ONGC from calling upon the guarantee in the event that Clough was able to establish a genuine dispute as to whether it was in breach of the contract? See Reed at 165.
In our view there was no such stipulation. We reject Clough’s submission that the words ‘on breach of contract’ in the performance guarantee indicate that the intention of the parties was that there must be actual breach before the guarantee could be invoked. To so confine the terms of the contract would be to ignore the words ‘notwithstanding any dispute(s) pending’ in cl 2 of the performance guarantee.
It seems to us to be plain that upon the proper construction of cl 3.3.3 of the contract, when read together with cl 2 of the performance guarantee, ONGC was entitled to invoke the guarantee notwithstanding the existence of a dispute between Clough and ONGC as to whether Clough had failed to honour any of its commitments under the contract.
The whole tenor of the performance guarantee is that it was payable on demand by ONGC on breach by Clough but without reference to Clough and without any ‘demur, reservation, contest or protest’ by that company. In our view this emphasises the proposition that the intention of the parties to the contract was that Clough was not entitled to raise the existence of a dispute as to whether it was in actual breach as an answer to an invocation of the guarantee and a claim under it.
This is further borne out by the stipulation in cl 2 of the form of guarantee that a written demand by ONGC on the bank would be conclusive and binding, without any proof of the amount payable, ‘notwithstanding any dispute(s) pending before’ a court or tribunal. [53]

[53]Clough Engineering (2008) 249 ALR 458, 481–2 [91]–[96].

As that passage from the judgment in Clough Engineering makes plain, the essential features of the contract, in that case, were that ONGC was entitled to have access to the guarantee upon demand made by it to the bank, without any proof the amount claimed was due and payable, and notwithstanding any dispute as to that amount before the Court. The terms of the contract in that case were antithetical to the existence, in the contract, of any negative stipulation affecting the right of recourse of ONGC to the performance guarantee letter. In that way, the contract, in Clough Engineering, was entirely distinct from the contract in the present case, which contained a negative stipulation (albeit implied), under cl 5.2, that in order that the respondent have recourse to the guarantee, the respondent must ‘remain unpaid after the time for payment’ under the contract.

It follows, from the foregoing analysis, that the decisions in Fletcher Construction, Bachmann and Clough Engineering are not inconsistent with the conclusion that I have reached that, on the correct construction of the terms of the contract, cl 5.2 precludes the respondent from recourse to the security in respect of an asserted claim by it for unliquidated damages for breach of contract.

Accordingly, grounds 1 and 2 should succeed. In light of that conclusion, it is not necessary for me to address the submissions made by counsel for the applicant concerning the effect of s 67J of the QBCC Act. As the effect of that provision was not the subject of full argument before the Court, it is preferable that I refrain from expressing any views about it.

Ground 3

Ground 3 of the application is based on the proposition that the judge erred in relying on the terms of the bank guarantee in order to construe the terms of the contract.

In construing a recourse provision in a contract, it is permissible to have regard to the form of a performance guarantee, or other security, that is contained in or part of the contract itself.[54] However, in this case, the guarantee was issued by Danske Bank almost two years after the contract was concluded between the parties, and it did not correspond with any form of guarantee or other security contained in or stipulated by the contract. Thus, it would not have been permissible for the judge to have had regard to it in order to construe the terms of the contract. However, I do not consider that the judge did have specific regard to the terms of the guarantee for that purpose. Rather, his Honour reached his conclusion, as to the meaning of the recourse clauses contained within the contract, by reference to the contract itself. While the judge stated that he was ‘fortified’ in his conclusion about the correct construction of those terms, nevertheless he determined that construction of the terms by reference to the contract alone, and not by reference to the guarantee. For those reasons I would not uphold ground 3.
[54]Ibid 480 [85]; Bachmann [1999] 1 VR 420, 437 [54]; Sugar Australia [2015] VSCA 98 [138].

Conclusion

As stated, contrary to the conclusion by the judge, in my view, on the correct construction of the contract between the parties, the respondent is not entitled to have recourse to the bank guarantee issued by Danske Bank in respect of the foreshadowed claim for unliquidated damages referred to in its letter to the applicant dated 13 November 2017.

Although, as mentioned, the application before the judge was for an interlocutory injunction, I have reached a concluded view as to the correct construction of the contract between the parties. In those circumstances, the question of which side is favoured by the balance of convenience has become irrelevant. In the course of submissions, counsel for each side accepted that if this Court were to reach a concluded view as to the meaning of the contract, as I have, then, logically, the issue of balance of convenience is otiose.

For the purpose of completeness, I should add that, if this application were determined in the ordinary way, involving an assessment of whether there was a serious issue to be tried, then clearly the balance of convenience would have favoured the respondent, in light of the undertaking that it gave, to the judge, and which it renewed on this application, that it would arrange for the Danske Bank to hold the proceeds of payment, under the guarantee, on trust for the applicant and the respondent upon resolution of the dispute between the parties or by order of any court or award of any arbitrator presiding over that dispute.

Orders

For the foregoing reasons, the application for leave to appeal should be granted and the appeal allowed. In light of the conclusions I have reached, I consider that the applicant should be entitled to an injunction restraining the respondent from calling on or otherwise requesting payment under the whole or any part of the bank guarantee issued by Danske Bank in favour of the respondent in reliance upon the letter dated 13 November 2017 from the respondent to the applicant’s solicitors.

[2017] VSCA 368

12 December 2017