Flsmidth Pty Ltd v Duro Felguera Australia Pty Ltd
[2016] WASC 191
•27 JUNE 2016
FLSMIDTH PTY LTD -v- DURO FELGUERA AUSTRALIA PTY LTD [2016] WASC 191
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2016] WASC 191 | |
| Case No: | CIV:1221/2016 | 20 APRIL 2016 | |
| Coram: | TOTTLE J | 27/06/16 | |
| 18 | Judgment Part: | 1 of 1 | |
| Result: | Application dismissed | ||
| B | |||
| PDF Version |
| Parties: | FLSMIDTH PTY LTD DURO FELGUERA AUSTRALIA PTY LTD |
Catchwords: | Contract Construction contract Performance bond Application for interlocutory injunction to restrain call on performance bond Whether contractual precondition of entitlement to call on bond met Whether defendant considered, acting bona fide, that it was entitled to recover amounts from plaintiff Performance bonds Commercial purpose of bond Parties' intentions Whether performance bond intended to act as security or as risk allocation device pending resolution of dispute or both Meaning of 'bona fide' Whether bona fides requires conduct to be reasonable Whether words 'acting bona fide' required defendant to adopt correct construction of contract Whether words 'acting bona fide' required defendant to adopt construction of contract which was not demonstrably wrong Contract Right of set off 'pass through' clause in subcontract Where defendant had head contract with another company Where both head contract and subcontract provided for liquidated damages for delay Where defendant claimed liquidated damages under subcontract Whether defendant could also 'pass through' to plaintiff delay damages claim by head contractor Interlocutory proceedings Whether appropriate to determine question of contractual construction finally Where construction issue not necessary to determine interlocutory application Not appropriate to determine question of construction |
Legislation: | Nil |
Case References: | Australian Broadcasting Corporation v O'Neill [2006] HCA 46; (2006) 227 CLR 57 Duro Felguera Australia Pty Ltd v Samsung C&T Corporation [2016] WASC 119 FMT Aircraft Gate Support Systems AB v Sydney Ports Corporation [2010] NSWSC 1108 Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 89 ALJR 990 National Australia Bank Ltd v Joyce [2012] WASC 224 Samsung Electronics Co Ltd v Apple Inc [2011] FCAFC 156; (2011) 217 FCR 238 Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd [2010] WASCA 222; (2010) 41 WAR 318 Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [2015] VSCA 98 The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CIVIL
- Plaintiff
AND
DURO FELGUERA AUSTRALIA PTY LTD
Defendant
Catchwords:
Contract - Construction contract - Performance bond - Application for interlocutory injunction to restrain call on performance bond - Whether contractual precondition of entitlement to call on bond met - Whether defendant considered, acting bona fide, that it was entitled to recover amounts from plaintiff
Performance bonds - Commercial purpose of bond - Parties' intentions - Whether performance bond intended to act as security or as risk allocation device pending resolution of dispute or both
Meaning of 'bona fide' - Whether bona fides requires conduct to be reasonable - Whether words 'acting bona fide' required defendant to adopt correct construction of contract - Whether words 'acting bona fide' required defendant to adopt construction of contract which was not demonstrably wrong
Contract - Right of set off - 'pass through' clause in subcontract - Where defendant had head contract with another company - Where both head contract and subcontract provided for liquidated damages for delay - Where defendant claimed liquidated damages under subcontract - Whether defendant could also 'pass through' to plaintiff delay damages claim by head contractor
Interlocutory proceedings - Whether appropriate to determine question of contractual construction finally - Where construction issue not necessary to determine interlocutory application - Not appropriate to determine question of construction
Legislation:
Nil
Result:
Application dismissed
Category: B
Representation:
Counsel:
Plaintiff : Mr J C Giles SC
Defendant : Mr S K Dharmananda SC & Mr T J Porter
Solicitors:
Plaintiff : Squire Patton Boggs
Defendant : Jones Day
Case(s) referred to in judgment(s):
Australian Broadcasting Corporation v O'Neill [2006] HCA 46; (2006) 227 CLR 57
Duro Felguera Australia Pty Ltd v Samsung C&T Corporation [2016] WASC 119
FMT Aircraft Gate Support Systems AB v Sydney Ports Corporation [2010] NSWSC 1108
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 89 ALJR 990
National Australia Bank Ltd v Joyce [2012] WASC 224
Samsung Electronics Co Ltd v Apple Inc [2011] FCAFC 156; (2011) 217 FCR 238
Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd [2010] WASCA 222; (2010) 41 WAR 318
Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [2015] VSCA 98
The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239
- TOTTLE J:
Introduction
1 The plaintiff has applied for an interlocutory injunction restraining the defendant from calling upon performance bonds provided pursuant to a subcontract (the Subcontract) for the design, manufacture and supply of three heavy duty cone crushers for the Roy Hill Iron Ore project in the north west of Western Australia (the Project).
2 On 15 February 2016, Pritchard J granted an interim injunction and made directions programming the application to a hearing.
Overview
3 For the purposes of this interlocutory application there was no dispute as to the facts. The facts recited below are taken from the plaintiff's affidavit evidence.
4 The Subcontract was made on 14 October 2013. It comprised a number of documents but only two are presently relevant: the Formal Instrument of Agreement (FIA) and the General Conditions of Subcontract (GCs). The Subcontract Sum was $6,304,686, which was subsequently reduced by a 'negative variation'. Payment was to be made in tranches on the achievement of various 'milestones'. The final tranche of 30% of the Subcontract Sum was to be invoiced upon 'Delivery FOB Port of Export'.
5 The Subcontract was part of a series of contractual relationships. The defendant had a contract (the Contract) with Samsung C&T Corporation (Samsung) to undertake the Subcontract work and other work and Samsung was in a contractual relationship with Roy Hill Holdings Pty Ltd, one of the owners of the Project.
6 The FIA imposed an obligation on the plaintiff to provide the defendant with various securities (collectively 'the Security') including a 'Performance Security' and a 'Warranty Security'. Each security was to be in an amount equal to 10% of the Subcontract Sum (cl 10 of the FIA).
7 In compliance with that obligation the plaintiff caused HSBC Bank Australia Ltd to issue two guarantees in favour of the defendant, each in the amount of $630,468. In the course of this application the defendant indicated that it does not intend to call upon the Warranty Security, so these reasons deal with the Performance Security only. The expiry date of the Performance Security has been extended a number of times and it is currently due to expire on 30 July 2016.
8 Clause 8 of the FIA provided that if the plaintiff failed to achieve the Milestone of supplying the cone crushers 'FOB Port of Export' by 9 July 2014 the defendant would be entitled to liquidated damages in an amount of 1% of the Subcontract Sum for each week of delay up to a maximum of 10% of the Subcontract Sum and would be entitled to draw down on the Security in respect of any liquidated damages not paid by the plaintiff.
9 Clause 33.7 of the GCs restated the defendant's entitlement to liquidated damages provided for in cl 8 of the FIA and recorded that the entitlement to liquidated damages would be in addition to any other remedies available to the defendant under the Subcontract or at common law. There was a delay in supplying the cone crushers and the defendant has claimed liquidated damages in the full amount allowed under the Subcontract.
10 The primary provision in the GCs dealing with recourse to the Security was cl 5.2(a). That clause allowed the defendant 'at any time' to convert into money any Security not already consisting of money, provided two conditions were met:
(i) the defendant considered, acting bona fide, that it was or would be entitled to recover the relevant amount from the plaintiff under or in respect of the Subcontract; and
(ii) the defendant had given the plaintiff five days' notice of its intention to have recourse to the Security (in order to enable the plaintiff to make alternative payment arrangements) and five days had elapsed since the notice was given.
11 Clause 36.1 of the GCs also enabled the defendant to have recourse to the Security. It provided that the defendant was entitled to deduct from monies otherwise due to the plaintiff:
(i) any debt or other moneys due from the plaintiff to the defendant under the Subcontract or otherwise at law; and
(ii) any monies deducted by Samsung from the payment under the Contract due to a reason for which the plaintiff was responsible.
12 It went on to provide that if the moneys due to the plaintiff were insufficient to discharge the debt or 'Claim', the defendant might have recourse to the Security.
13 The plaintiff has completed the Subcontract works and rendered its final invoice in the sum of $945,702.90.
14 By letter dated 5 February 2016, the defendant's Project Director, Mr Eduardo Rodriguez, gave the plaintiff notice of the defendant's intention to have recourse to the Security. In the letter Mr Rodriguez wrote:
DF considers, acting bona fide, that it is or will be entitled to recover the amounts stated below from FLS under or in respect of the Contract, including on the grounds summarised in this letter. On this basis and in accordance with clause 5.2(a)(ii), by this letter, DF gives FLS 5 days' notice of DF's intention to have recourse to the Security.
1. Samsung's claims against DF for defects (subject to adjustment based on Samsung providing further information) $190,400
2. Claim for repayment of amount of negative variation $54,771.95
3. Damages for delay, being either:
(a) Samsung's claims against DF for liquidated damages; $1,380,000 or
(b) Alternatively, liquidated damages under the Contract $630,468.60
Total $1,625,172
Alternatively: $859,732.59
DF does not currently claim or demand the combined sum of items 3(a) and 3(b); but reserves its right to do so in the future, and its right to make other claims for delay or other damages.
15 By the time the application came on for hearing on 20 April 2016 the defendant's position had changed and its claims as at that date were summarised as follows:
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17 The plaintiff submitted that if the 'pass through claim for Samsung's damages' was not deductable there was a balance due by the defendant to it. Using the defendant's figures the balance would be $168,306.51. On that basis the plaintiff contends it was not open to the defendant to consider that it was or would be entitled to recover any amount from the plaintiff and thus no recourse may be had to the Security.
Relevant legal principles
18 The principles concerning interlocutory injunctions are well-known. First, an applicant must demonstrate that there is a serious question to be tried as to its entitlement to relief at trial. The requisite strength of the probability of ultimate success depends on the nature of the rights asserted and the practical consequences likely to flow from the relief sought: Australian Broadcasting Corporation v O'Neill [2006] HCA 46; (2006) 227 CLR 57 [71] (Gummow & Hayne JJ). Secondly, an applicant must demonstrate that damages would be an inadequate remedy and thirdly it must demonstrate that the balance of convenience favours the grant of an interlocutory injunction. The adequacy of damages is not independent of the balance of convenience: Samsung Electronics Co Ltd v Apple Inc[2011] FCAFC 156; (2011) 217 FCR 238 [61]; National Australia Bank Ltd v Joyce [2012] WASC 224 [38].
The issues and the parties' contentions
19 The issues are:
1. Has the plaintiff established a serious question to be tried that by realising the Security the defendant will breach the Subcontract?
2. Does the balance of convenience favour the grant of an injunction restraining the realising of the Security?
20 In outline the plaintiff's contentions are as follows:
(i) The Security was provided as security for any liability on the part of the plaintiff established under the Subcontract and not as a mechanism for allocating the risk as to who should be out of pocket pending the resolution of a dispute as to liability.
(ii) The condition in cl 5.2(a)(i) GCs that the defendant 'considers, acting bona fide, that it is or will be entitled to recover the relevant amount from the Subcontractor' required the defendant to construe the Subcontract correctly, or at least not to adopt a construction that could be determined on a summary basis to be wrong. The clause required more than subjective honesty. It was contended that the construction of the Subcontract adopted by the defendant was wrong and that thus it had not acted bona fide.
(iii) Clause 36.1 of the GCs did not give the defendant a right to withhold any amount from the plaintiff for which it could not make a claim against the plaintiff, that is, any amount for which the plaintiff might be 'liable'. Since the defendant's only entitlement in relation to delay by the plaintiff was a claim for liquidated damages under cl 8 of the FIA and cl 33.7 of the GCs, a claim on the basis of delayed performance could not be not be made under cl 36.1(b). The plaintiff argued the Subcontract did not allow for double recovery in respect of losses occasioned by delay - the defendant could not claim liquidated damages under cl 33.7 and, in effect, claim unliquidated damages by passing through Samsung's claim for delay damages under cl 36.1(b).
(iv) If the defendant were permitted to realise the Security the plaintiff would suffer reputational damage for which damages would not be an adequate remedy.
(v) The defendant's financial position was such that there was a real issue about its ability to repay the amount realised.
21 The defendant challenged each of the plaintiff's contentions.
22 For the purposes of considering whether the plaintiff has established a serious question to be tried I will commence by determining the commercial purpose of the Security. I will then consider what is required to satisfy the condition in cl 5.2(a)(i) of the GCs which is embodied in the words, 'the Contractor considers, acting bona fide, that it is or will be entitled to recover the relevant amount from the Subcontractor under or in respect of the Subcontract' and whether the defendant has satisfied that condition. I will then consider the issues concerning the construction of cl 36.1(b) of the GCs before turning to the balance of convenience.
What was the commercial purpose of the Security?
23 The plaintiff contended that the Security was intended to provide the defendant with security in respect of any liability that might be established on the part of the plaintiff. The defendant contended that the Security was provided to effect an allocation of cash flow risk.
24 The significance of this issue lies in its relevance to the assessment of the status quo between the parties. In Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [2015] VSCA 98, Osborn and Ferguson JJA explained the point as follows:
if it be the case that the commercial purpose of the performance bond was to allocate risk pending final determination of the dispute. Such a contractual provision fundamentally alters the context in which the Court must exercise its discretion by changing the complexion of the status quo and raising the prospect of substantial injustice if the purpose of the provision is defeated. That is, the status quo in such circumstances becomes what the parties have agreed as to which of them should bear the financial risk pending final determination, not the continuation of where that risk would naturally fall in the absence of a performance bond to call upon. [31]
25 Their Honours went on to observe at [34] and [35] that if the commercial purpose of a contractual provision is defeated, that bears upon the ultimate risk of injustice inherent in the grant of an injunction, as the grant of an interlocutory injunction has the capacity to amount to final relief defeating the commercial purpose of risk allocation prior to the final determination of the matter.
26 In Sugar Australia the court recognised that parties may intend the provision of a performance bond to operate both as a risk allocation device and as security.
27 If a performance bond operates as a cash flow risk allocation device, it will have the incidental benefit of providing security to the beneficiary of the bond.
28 In support of its contention that the Security was intended to be no more than security the plaintiff relies on cl 10 of the FIA which sets out the terms of the various securities to be provided and records:
The supply of the Securities mentioned in this clause shall in no way reduce the liability of the Subcontractor under the Subcontract, and merely constitutes a means to enforce said liability.
29 The defendant argued that cl 10 of the FIA did not reflect the commercial purpose of the Security. Its submissions focussed heavily on cl 5 of the GCs. This provision has a number of features that support the conclusion that the Security was intended to operate as a risk allocation device. Those features are as follows:
(i) realisation of the Security is conditioned on the giving of notice and on '[the defendant] consider[ing], acting bona fide, that it is or will be entitled to recover the relevant amount from [the plaintiff]' and not upon an objective finding being made that the plaintiff is liable to pay the relevant amount (cl 5.2(a));
(ii) if the defendant is required to release the Security it has the right to retain from the Security an amount sufficient to cover either any money or debt due or payable by the plaintiff or a bona fide claim for payment of any amount which the defendant considers may become a debt due and payable by the plaintiff in accordance with or arising out of the Subcontract. Once again this right is not conditioned upon an objective finding being made that the plaintiff is liable to pay the relevant amount (cl 5.4);
(iii) the defendant does not hold the Security or any moneys resulting from conversion of the Security on trust for the plaintiff and any money earned from the use of any such moneys will be retained by the defendant (cl 5.5).
30 Clause 36.1(b) is also relevant. In its written submissions the plaintiff acknowledged that cl 36.1(b) effected an allocation of cash flow risk, though it contended the clause did not permit a deduction for compensation for delay.
31 The critical element of both cl 5 and cl 36.1(b) of the GCs is that they enable the defendant to realise the Security and use the proceeds of realisation as its own funds without restriction before any finding as to the liability of the plaintiff is made. That provides strong support for the conclusion that the parties intended the Security to operate as a risk allocation device in respect of cash flow.
32 The construction proposed by the defendant - that the Security operates solely as a means of providing security for the plaintiff's liability under the Subcontract - fails to accord any significance to the clear terms of cl 5 and cl 36.1(b) which, as noted, enable the defendant to realise the Security before a liability on the part of the plaintiff is established.
33 Clause 10 of the FIA and cl 5 and cl 36.1(b) of the GCs must be construed so that they operate harmoniously. They comprehend three situations in which the Security may be converted.
(i) The first is that dealt with by cl 10 of the FIA, that is, where the liability of the plaintiff has been established. The primary purpose of the sentence upon which the plaintiff relies is to convey the point that the Security does not reduce or limit the liability of the plaintiff. Its secondary purpose is to emphasise that the Security constitutes a means of enforcement of the plaintiff's liability, that is, the provision of the Security operates as a security for a liability on the plaintiff's part. Clause 10 does not, however, embody or reflect the entirety of the parties' intentions in relation to the commercial purposes of the Security. That much is plain from the inclusion in the GCs of cl 5 and cl 36.1(b). Clause 10 simply records the parties' intention that the Security may operate as a security where there is an objectively established liability on the part of the plaintiff.
(ii) The second situation is that contemplated by cl 5 of the GCs which is concerned with the amount the defendant considers it is or might be entitled to recover from the plaintiff. This subjective assessment of a potential liability is to be contrasted with an actual liability established objectively as contemplated by cl 10 of the FIA. The reference to 'a means to enforce said liability' in cl 10 has no relevance to the operation of cl 5 which in very plain terms is designed to enable the defendant to have access to the cash equivalent of the amount in dispute before any liability on the part of the plaintiff has been established.
(iii) The third situation is that contemplated by cl 36.1(b) of the GCs which, like cl 5, is not concerned with an established liability of the plaintiff of the nature contemplated by cl 10. Thus, once again, the reference in cl 10 to the Security being a means to enforce a liability has no relevance to the operation of cl 36.1(b).
34 Viewed in the way I have outlined, cl 10 of the FIA reflects the parties' intention that the Security should be security for liabilities of the plaintiff and cl 5 and 36.1(b) of the GCs reflect the parties' intention that the Security should operate a cash flow risk allocation device in relation to those amounts which the defendant considers, acting bona fide, it is or may be entitled to recover from the plaintiff and in relation to those amounts that may be deducted pursuant to cl 36.1(b). Clauses 5 and 36.1(b) enable the defendant to obtain the benefit of the cash flow in respect of disputed amounts before the dispute is resolved.
35 For the above reasons I conclude that the Security was intended by the parties to operate both as a risk allocation device and as security.
What must the defendant do to satisfy the condition in cl 5.2(a)(i) of the GCs?
36 The issue of what is meant by the words 'the Contractor considers, acting bona fide' involves the construction of the Subcontract. The question is what would a reasonable business person have understood the phrase to mean, having regard to the text, context and commercial purpose of the contractual provision: Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 89 ALJR 990 [47] (French CJ, Nettle & Gordon JJ).
37 'Acting bona fide' means 'acting in good faith'. Much of the debate in the case law on the meaning of the phrase 'in good faith' focusses upon whether an obligation to act in good faith imports a notion of compliance with standards of conduct that are reasonable, as well notions of loyalty to the bargain, and compliance with honest standards of conduct.
38 In Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd [2010] WASCA 222; (2010) 41 WAR 318, Pullin JA, with whose reasons Newnes JA agreed, reviewed the authorities in which this issue had been discussed before concluding that the reciprocal contractual obligation of the parties in that case to deal with each other in good faith only required the parties to deal with each other honestly: [61]. Murphy JA construed the contractual obligation in a manner which embodied all three notions referred to in the preceding paragraph: [94] to [97].
39 In Duro Felguera Australia Pty Ltd v Samsung C&T Corporation [2016] WASC 119, Le Miere J construed cl 5.2 of the Contract (ie, the contract between Samsung and the defendant, referred to in cl 36.1(b) of the GCs in this case), which was in the same terms as cl 5.2 of the Subcontract. His Honour concluded that the condition required Samsung to act objectively bona fide,
in the sense that it cannot bona fide consider that it is or will be entitled to recover the relevant amount if there is no real or proper foundation for that consideration. A consideration will be bona fide if there is either a genuine issue of material fact that bears upon Duro's liability or an arguable contention as to the construction of the contract or both. However, in deciding whether Samsung considers, acting bona fide, that it is or will be entitled to recover the relevant amount the court must not resolve any genuine issues of fact or law. [27]
40 I approach the construction of cl 5.2 of the GCs on the basis that the parties are sophisticated, well-advised commercial entities who may be taken to have been aware of the numerous decisions concerning contractual provisions dealing with the circumstances in which a party may have recourse to a performance bond, and that they have contracted against that background and chosen the words employed in cl 5.2(a)(i) carefully: FMT Aircraft Gate Support Systems AB v Sydney Ports Corporation [2010] NSWSC 1108 [10] (Pembroke J).
41 In my view the language used in cl 5.2(a)(i) reveals an intention to confer upon the defendant a wide discretion constrained only by a requirement on its part to act honestly. Had the parties intended that the defendant's right to have recourse to the Security should be conditioned by a requirement that it first construe the contract correctly, or that it at least adopt a construction that cannot summarily be determined to be wrong, then they might be expected to have used words that clearly imported the notion of reasonableness, for example by adding the words 'and reasonably' after the words 'acting bona fide'. They did not do so and in the absence of words importing a standard of reasonableness it should not be inferred that they intended that the defendant would only be entitled to call upon the Security if it adopted either the correct construction of the Subcontract or, at least, a reasonable construction of it.
42 This is not to say that objective considerations are irrelevant to the assessment of whether the defendant has acted in good faith. The court can look at the circumstances in which the call on the Security has been made, including the construction of relevant contractual provisions adopted by the defendant, to assist it in determining the truth of the assertion that the defendant is acting in good faith: cfThe Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239 [4619] (Owen J). An absence of a real or proper foundation for the construction of the Subcontract would reflect adversely on the assessment of whether a party acted in good faith: cf Le Miere J's observations in Duro Felguera Australia Pty Ltd v Samsung C&T Corporation [2016] WASC 119 [27].
The construction of cl 36.1(b) of the GCs
43 The plaintiff submitted that the defendant's construction of cl 36.1(b), which permitted it to 'pass through' Samsung's delay damages, was 'wrong to demonstration'.
44 The plaintiff submitted that Sugar Australia and various cases referred to in it were authority for the proposition that I should construe cl 36.1 on a final basis on this application. I do not accept that submission.
45 The observations of Osborn and Ferguson JJA at [43] - [53] and Kaye JA at [111] in Sugar Australia are authority for the proposition that controversial questions of construction should be resolved on an application for an interlocutory injunction to restrain realisation of a performance bond if the outcome of the injunction application depends upon the resolution of those questions of construction.
46 In the light of the conclusion I have reached regarding the content of the defendant's obligation to act 'bona fide' it is not necessary to resolve the construction issue about cl 36.1(b) raised by the plaintiff's submissions in order to determine this injunction application.
47 I will, however, give consideration to whether the construction of cl 36.1(b) adopted by the defendant is untenable as this has the capacity to reflect on the defendant's evidence as to whether it acted 'bona fide'.
48 Clause 36.1 reads as follows:
The Contractor may deduct from any moneys otherwise due to the Subcontractor:
(a) any debt or other moneys due from the Subcontractor to the Contractor under the Subcontract or otherwise at law; or
(b) any moneys deducted by the Client from the payment under the Contract due to a reason for which the Subcontractor is responsible;
and if the moneys due to the Subcontractor are insufficient to discharge the debt or Claim, the Contractor may have recourse to any Security or retention provided by the Subcontractor or both.
The rights given to the Contractor under this clause are in addition to and do not limit or affect any other rights of the Contractor under the Subcontract or at law and nothing in the clause affects the right of the Contractor to recover from the Subcontractor the whole of the debt or Claim in question or any balance that remains owing.
Failure by the Contractor to deduct from an amount otherwise due to the Subcontractor any amount which the Contractor is entitled to deduct under this cl 36.1, will not prejudice the Contractor's right to subsequently exercise its right of deduction under this clause.
This cl 36.1 will survive any termination of the Subcontract.
49 The plaintiff's contentions in respect of cl 36.1 were as follows:
(i) Clause 36.1(b) does not give the defendant a right to withhold an amount of money for which it does not have a claim against the plaintiff. The word 'responsible' in cl 36.1(b) limits the deductions that may be made to those claims in respect of which the plaintiff is liable to the defendant. As I have already noted, the plaintiff accepted that cl 36.1(b) effects an allocation of cash flow risk, but, so the plaintiff argues, only in respect of amounts for which it is liable to the defendant if the money is properly withheld by Samsung.
(ii) The second sentence in cl 36.1 shows that the provision is directed to amounts which are or will be payable by the plaintiff to the defendant, that is amounts for which the plaintiff is or will be liable under the Subcontract.
(iii) Permitting the defendant to pass through Samsung's claim for liquidated damages to the plaintiff will provide the defendant with double recovery of compensation for delay given the defendant's right to liquidated damages under cl 33.7. The plaintiff argues that this improbable result could not reflect the intention of the parties assessed on an objective basis.
50 In response the defendant contends that:
(i) The only limitations on the defendant's right to pass through the deductions made by Samsung are limitations identified by reference to the criteria of 'scope and causation', that is, did the reason for the deduction fall within the scope of the Subcontract works and was it causally related to the performance of the Subcontract works.
(ii) The defendant accepts that the deduction it has made in respect of the liquidated damages gives rise to the possibility of double recovery but contends: first, that the loss which is being passed through is Samsung's loss not that of the defendant and it cannot be assumed that there is an overlap between the defendant's loss and Samsung's loss; and, secondly, that if there is any element of double recovery it will be accounted for in the arbitral proceedings that will be commenced to resolve the differences between the parties.
51 Having regard to the defendant's right to claim liquidated damages for delay under cl 33.7, the issue of whether cl 36.1(b) should be construed as permitting the defendant to pass through a 'delay' deduction made by Samsung is not straightforward.
52 Whilst I consider that there is force in the plaintiff's submissions that cl 36.1(b) should not be construed as permitting the defendant to make a delay deduction, the construction advanced by the defendant is not so untenable that it can be inferred from the defendant's adoption of it that the defendant acted otherwise than bona fide in its consideration of its entitlement to realise the Security. My reasons for reaching that view are as follows.
53 The plaintiff accepts cl 36.1(b) effects an allocation of cash flow risk. The ability to make a deduction is expressed in very wide terms: 'any moneys deducted by the Client'. There are no words of limitation which would provide support for the construction for which the plaintiff contends. Further the words 'due to a reason for which the Subcontractor is responsible' suggest, contrary to the plaintiff's submission, that the defendant's ability to pass through deductions is not limited to those deductions made for a reason for which the plaintiff is liable. The word 'liable' and its cognate 'liability' are used elsewhere in the GCs and it must be assumed that the parties have used the word 'responsible' in cl 36.1(b) to convey a meaning other than 'liable'. For this reason it is more likely that the parties intended that 'responsible' should bear its dictionary definition, 'accountable', (Macquarie Dictionary, 6th ed, 2013). In the context of a construction contract 'accountability' is a concept that embraces the criteria of 'scope and causation' identified by the defendant as the only limitations on what may be deducted pursuant to cl 36.1(b). As the defendant acknowledged, there is a possibility of double recovery by it on an interim basis pending an accounting between the parties following a determination of the claims between them in arbitral proceedings. The possibility of double recovery on an interim basis is a consequence of the allocation of cash flow risk contemplated by the provision.
Is there a serious question to be tried that the defendant will be in breach of the Subcontract if it realises the Security?
54 The defendant relied upon the affidavit evidence of Mr Rodriguez to establish that in his capacity as the defendant's Project Director he considered that the defendant was or would be entitled to recover a total of $2,145,549.39 from the plaintiff, which after deduction of the plaintiff's invoice, would leave a balance in the defendant's favour of $1,199,846.49.
55 The plaintiff did not assert that Mr Rodriguez did not act bona fide in the sense that he was not honest in his consideration of the amounts the defendant was or would be entitled to recover from the plaintiff. I accept that Mr Rodriguez, and thus the defendant, acted honestly in considering the amounts the defendant was or would be entitled to from the plaintiff.
56 In the light of the conclusions I have expressed that:
(i) the Security was provided as method of allocating cash flow risk;
(ii) clause 5.2(a)(i) of the GCs did not require the defendant to construe the Subcontract correctly, or alternatively, to adopt a reasonable construction of the Subcontract;
(iii) the construction of the Subcontract adopted by the defendant was not untenable; and
(iv) the defendant acted honestly,
the plaintiff has failed to establish that there is a serious question to be tried that by realising the Performance Security the defendant will breach the Subcontract.
The balance of convenience
57 In the light of my conclusion that the plaintiff has not established a serious question to be tried it is unnecessary to consider the balance of convenience at any length.
58 I accept that a company involved in the construction industry suffers the risk of reputational damage if a performance bond given by it is realised. Mr John Pickerill deposed to the fact that potential clients of the plaintiff often inquire whether performance bonds given at its request have been called upon. It may be inferred that disclosing that a performance bond has been called upon has the capacity to damage the plaintiff's reputation in a manner that is difficult to quantify. The plaintiff, however, gave the performance bond on terms negotiated by it knowing that there was a risk that it might be realised. In the light of my findings on the 'serious question to be tried' issue, the potential for reputational damage does not justify the grant of an injunction. Moreover, it is open to the plaintiff to avoid the reputational damage by paying the amount of the Performance Security to the defendant. The plaintiff has not adduced evidence to the effect that it cannot pay this amount.
59 The plaintiff has adduced evidence, in the form of financial statements, that it contends discloses a risk that the defendant may not be able to repay the money received by it on realisation of the Security. It also points to the fact that Samsung has called upon performance bonds given by the defendant to Samsung and that the defendant is involved in litigation with Samsung. The financial statements disclose that at 31 December 2014 the defendant's assets included cash or cash equivalents of $162,246,934 and that its net assets were $5,617,046. There is a considerable element of speculation involved in the proposition that there is a risk that the defendant may not be able to repay the amount realised on presentation of the Performance Security. I do not consider that the risk, such as it might be, justifies the grant of an injunction thereby depriving the defendant of the benefit of the bargain for which it contracted.
60 For the reasons I have given the plaintiff's application should be dismissed. I will hear the parties as to costs.
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