JKC Australia LNG Pty Ltd v CH2M Hill Companies Ltd - [2019] WASC 177

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL

CITATION:   JKC AUSTRALIA LNG PTY LTD -v- CH2M HILL COMPANIES LTD [2019] WASC 177
CORAM:   QUINLAN CJ
HEARD:   12 & 13 MARCH 2019
DELIVERED          :   24 MAY 2019
PUBLISHED           :   24 MAY 2019
FILE NO/S:   CIV 2584 of 2018
BETWEEN:   JKC AUSTRALIA LNG PTY LTD
Plaintiff
AND
CH2M HILL COMPANIES LTD
First Defendant
UGL PTY LIMITED
Second Defendant
GENERAL ELECTRIC COMPANY
Third Defendant

Catchwords:

Contract - Construction of commercial contracts - Proper construction of parent company guarantees - Nature of guarantor obligations - Whether guarantees can be construed as performance bond - Whether guarantor liability is dependent upon actual liability of subcontractor - Whether presumption against construction as performance bond outside of banking context - Application for declarations as to proper construction - Application dismissed
Declarations - Whether hypothetical questions - Discretionary considerations - Application dismissed

Legislation:

Rules of the Supreme Court 1971 (WA)

Result:

Application for declarations dismissed

Category: B

Representation:

Counsel:

Plaintiff	:	Mr S K Dharmananda SC & Mr J Garas & Dr R A Collins
First Defendant	:	Mr J J Gleeson QC & Mr B Dharmananda SC & Mr P Thiagarajan
Second Defendant	:	Mr J J Gleeson QC & Mr B Dharmananda SC & Mr P Thiagarajan
Third Defendant	:	Mr J J Gleeson QC Mr B Dharmananda SC & Mr P Thiagarajan

Solicitors:

Plaintiff	:	Clyde & Co
First Defendant	:	Corrs Chambers Westgarth
Second Defendant	:	King & Wood Mallesons
Third Defendant	:	Fenwick Elliott Grace

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

Bass v Permanent Trustee Company Ltd [1999] HCA 9; (1999) 198 CLR 334
Byrnes v Kendle (2011) 243 CLR 253
Catalyst Business Finance Ltd v Very Tangy Television Ltd [2018] EWHC 1699 (QB)
Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd (2008) 249 ALR 458
CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [2017] WASC 112
CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [No 2] [2017] WASCA 123
EDWF Holdings 1 Pty Ltd v EDWF Holdings 2 Pty Ltd (2010) 41 WAR 23
Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd (2014) 251 CLR 640
Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812
IIG Capital LLC v Van De Merwe [2008] EWCA Civ 542
Kawasaki Heavy Industries, Ltd v Laing O'Rourke Australia Construction Pty Ltd [2017] NSWCA 291
Marubeni Hong Kong and South China Ltd v Mongolian Government [2005] 1 WLR 2497
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104
Multiplex Construction Europe Ltd v Gordon Alan Dunne [2017] EWHC 3073
Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85
Sugar Australia Pty Ltd v Lend Lease Pty Ltd [2015] VSCA 98
Universal Publishers Pty Ltd v Australian Executor Trustees Ltd [2013] NSWSC 2021
Vossloh Aktiengesellschaft v Alpha Trains (UK) Ltd [2011] 2 All ER (Comm) 307
Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522
Wood Hall Ltd v Pipeline Authority (1979) 141 CLR 443

QUINLAN CJ:

Introduction

This is an application by JKC Australia LNG Pty Ltd (JKC) for declarations as to the proper construction of three separate Parent Company Guarantees executed by the defendants, CH2M Hill Companies Ltd, UGL Pty Ltd, and General Electric Company on 27 April 2012 (the Parent Company Guarantees).[1]
[1] As the Parent Company Guarantees are in identical terms, they are referred to in these reasons in the singular (the Parent Company Guarantee) or the plural (Parent Company Guarantees), as the context requires.
The Parent Company Guarantees were provided by the defendants[2] to guarantee the due performance of the Subcontractor's obligations under a subcontract dated 27 April 2012 between JKC, as Contractor, and a consortium comprising an unincorporated joint venture between CH2M Hill Australia Pty Ltd, UGL Infrastructure Pty Ltd, General Electric Company and General Electric International Inc (the Subcontract).[3] As is apparent, one of the defendants who provided a Parent Company Guarantee, General Electric Company, is also one of the companies in the consortium comprising the Subcontractor.
[2] As the context requires, the defendants are also referred to, in these reasons, as the guarantors.
[3] The Subcontract is Exhibit 2. The consortium is defined in the Subcontract and in the Parent Company Guarantees, collectively, as 'the Subcontractor'. That description is also used in these reasons.
By the Subcontract, the Subcontractor promised to perform certain works (the Works) associated with the Ichthys Project, a Brobdingnagian LNG development in Darwin, in relation to which JKC was the main contractor. Specifically, the Works related to a combined cycle power plant to be built for the Ichthys Project.[4]
[4] See Subcontract (Exhibit 2), Form of Agreement, cl 2.
The parties agree that the Subcontract was terminated no later than 2 February 2017.[5]
[5] Statement of Agreed Facts dated 26 February 2019 (Exhibit 1) [8].
Nevertheless, JKC and the Subcontractor are, and remain, in dispute as to which party validly terminated the Subcontract. That dispute is the subject of an arbitration in which JKC claims, inter alia, reimbursement of its additional costs and expenses in completing the Works, and the Subcontractor claims, inter alia, the value of the works it had already performed on a quantum meruit basis.[6]
[6] Exhibit 2 [8] - [9].
On 24 July 2018, and again on 2 November 2018, JKC gave written notices to each of the guarantors, requiring the guarantors to discharge certain liabilities of the Subcontractor that JKC asserted the guarantors were liable to discharge under the Parent Company Guarantees (the Notices of Demand).[7]
[7] The Notices of Demand dated 24 July 2018 are, collectively, Exhibit 10. The further Notices of Demand are referred to in Exhibit 1 [32].
The Subcontractor's liabilities relied upon by JKC in the Notices of Demand were liabilities alleged to arise under Article 50.5(c) of the Subcontract General Terms and Conditions (General Terms). Article 50.5(c), in broad terms, provides that the Contractor's additional costs and expenses in completing the Works in the event of termination or takeover of the Subcontract by JKC, are a debt due to JKC by the Subcontractor.
The defendants deny that they have any liability under the Parent Company Guarantees for the amounts claimed. In response to the Notices of Demand, the defendants asserted, inter alia, that the Subcontractor had no liability under Article 50.5(c) of the Subcontract General Terms (or otherwise), because JKC had not validly terminated the Subcontract.
In that regard, whether the Subcontractor has any liability to JKC under Article 50.5(c) of the Subcontract General Terms, is a matter very much in issue between JKC and the Subcontractor in the arbitration.[8]
[8] See Arbitration documents (Exhibit 16), Statement of Defence and Counterclaim [29.1] - [29.137]; Claimants' Reply to Statement of Defence and Counterclaim [25.1] - [25.111].
In this context, the defendants deny liability to answer the Notices of Demand under the Parent Company Guarantees, inter alia, on the basis that, on their proper construction, any obligation of the defendants under the Parent Company Guarantees are expressly subject to any defence, set-off or counterclaim available to the Subcontractor in relation to the Subcontractor's primary liability. As I have noted, the Subcontractor asserts such defences and counterclaims against JKC in the arbitration.
JKC, nevertheless, submits that the Parent Company Guarantees, on their proper construction, are 'pay now, argue later' instruments and that the liability of the defendants to respond to the claim under the guarantees is not (at least in the first instance) subject to any defence, set-off or counterclaim. That is, JKC contends that the Parent Company Guarantees, and in particular cl 3 of each instrument, operate in a manner akin to performance bonds, such that the defendants are obliged to discharge the Subcontractor's liabilities alleged to arise under Article 50.5(c) of the Subcontract General Terms, notwithstanding that those liabilities are a matter of dispute. JKC alleges, in effect, that the defendants are required to put JKC 'in the money' to the extent of that disputed liability, pending the determination of that dispute in the arbitration.
Whether the Parent Company Guarantees, as a whole, have that character is the central issue in these proceedings.
As I noted at the outset, the relief sought by JKC is in the form of declarations as to the proper construction of the Parent Company Guarantees. JKC does not bring an action to enforce the Parent Company Guarantees. Had it done so there is no doubt that there would have been (and would be now) numerous legal and factual disputes between the parties.[9] Those underlying (and unresolved) disputes, the defendants submit, are such that the declaratory relief sought by JKC is hypothetical and should be refused in the court's discretion.[10] I will address this submission (and the appropriateness of declaratory relief generally) later, in the context of my consideration of the substantive issues.
[9] In addition to the disputed issues (as between JKC and the Subcontractor) in the arbitration, JKC and the defendants are in dispute as to whether JKC could have, or in fact, formed the 'reasonable opinion' required by cl 3 of the Parent Company Guarantees. The various areas of dispute are set out in a Statement of Un‑Agreed Facts filed by the defendants on 27 February 2019.
[10] Bass v Permanent Trustee Company Ltd [1999] HCA 9; (1999) 198 CLR 334.
Given their centrality to the issues to be decided by me, however, it is appropriate to commence by setting out the relevant provisions of the Parent Company Guarantees.

The Parent Company Guarantees

As noted above, the Parent Company Guarantees are all in identical form. That form is itself prescribed by the Subcontract. For ease of reference I have set out the relevant provisions of the Parent Company Guarantee provided by CH2M Hill Companies Ltd. The Parent Company Guarantees provided by the second and third defendants are in identical terms. The Parent Company Guarantee relevantly provides:
By this document (Parent Company Guarantee) dated this 27 day of April, 2012.
CH2M HILL Companies Ltd, a company incorporated in accordance with the laws of Delaware, whose principal office is located at 9191 South Jamaica Street Englewood, Colorado 80112 (the Guarantor),
RECITALS
(A)On or about the date of this deed, JKC Australia LNG Pty Ltd, a company incorporated in accordance with the laws of Western Australia, whose registered office is at Level 18, Central Park, 152-158 St Georges Terrace, Perth WA 6000 (the 'Contractor') entered into a contract titled EPC Combined Cycle Power Plant (the 'Subcontract'') with the consortium comprising the unincorporated joint venture between CH2M Hill Australia Pty Limited and UGL Infrastructure Pty Limited, General Electric Company and General Electric International, Inc. (the 'Subcontractor').
(B)It is a requirement under sub-Article 35.2 of the Subcontract that the Guarantor enter into, execute and deliver this deed.
(C)The Subcontractor is a consortium of companies which are jointly and severally liable to the Contractor for the performance of the Subcontract.
IT IS AGREED AS FOLLOWS
1.Definitions and interpretations
In this deed, unless the context otherwise requires, a word or phrase defined in the Subcontract has the same meaning as in the Subcontract.
2.Guarantee
Subject to Clause 9, the Guarantor unconditionally and irrevocably guarantees to Contractor the due and punctual performance of the obligations of the Subcontractor under the Subcontract including:
(a)the discharge of the obligations and liabilities of the Subcontractor under the Subcontract; and
(b)the payment of any amounts due and unpaid under the Subcontract.
3.Guarantor to perform
If, in Contractor's reasonable opinion, the Subcontractor fails to perform any of the Subcontractor's obligations or discharge any of the Subcontractor's liabilities under the Subcontract, the Guarantor must upon receipt of written notice from Contractor requiring it to do so, perform or cause to be performed those obligations or discharge those liabilities (as the case may be) and thereafter continue to perform those obligations and discharge those liabilities (as the case may be) until the termination of the Subcontractor by the effluxion of time or otherwise.
The Contractor is not required to enforce its rights against the Subcontractor prior to having recourse to its rights under this deed.
…
5.Continuing obligation
The guarantee contained in this deed is a continuing obligation of the Guarantor, despite any settlement of account or the occurrence of any other thing and, subject to clause 9, remains in full force and effect until all the obligations of the Subcontractor under the Subcontract have been performed
6.Nature of Guarantor's obligations
6.1Principal obligations
The obligations of the Guarantor under this deed in respect of the Subcontract are principal obligations and are not released, discharged or otherwise affected by anything which but for this provision might have that effect, including:
(a)the grant to any person of any time, concession, waiver, covenant not to sue or other indulgence or release;
(b)any alteration, amendment or change of the Subcontract; or
(c)any assignment, assumption or transfer of, or other dealing with, any rights or obligations under the Subcontract.
6.2Application of clause 6.1
Clause 6.1 applies irrespective of the consent or knowledge, or lack of consent or knowledge, of Contractor, the Guarantor or any other person of any event described in clause 6.1 or of any rule of law or equity to the contrary.
6.3Guarantor to be bound by dispute resolution process
The Guarantor agrees that it is bound by:
(a)the outcome of any dispute resolution process between the Contractor and the Subcontractor under the Subcontract; or
(b)any settlement agreed between the Contractor and the Subcontractor in relation to the Subcontract.
6.4Insolvency of Debtor
The Guarantor must not, until it has discharged its obligations under this deed in full and the Contractor is of the reasonable opinion that no payment of that money is or is likely to become void, voidable or otherwise enforceable or fundable:
(a)directly or indirectly claim or receive the benefit of any distribution, dividend or payment; or
(b)prove or claim for any distribution, dividend or payment in competition with the Contractor,
in the insolvency of the Subcontractor so as to diminish any distribution, dividend or payment which, but for that claim or proof, the Contractor would be entitled to receive.
6.5Indemnity
Subject to Clause 9, the Guarantor unconditionally and irrevocably indemnifies the Contractor against any and all demands, claims, suits, actions, damages, liabilities, losses, costs and expenses which may be made or brought against or suffered or incurred by the Contractor if the Subcontract cannot be enforced against the Subcontractor or against the Guarantor as surety by reason of:
(a)any lack of authority or lack of power, any legal limitation, disability or incapacity of or affecting any person;
(b)the obligations of the Subcontractor under the Subcontract being void, voidable or otherwise unenforceable (whether or not the Guarantor knew or ought to have known about it); or
(c)the insolvency of the Subcontractor.
…
9.Limitation of Liability
9.1Save for any direct costs, losses and/or expenses, properly incurred by the Contractor in connection with any successful enforcement of the rights and obligations under this Guarantee, which shall in all circumstances be payable to the Contractor by the Guarantor, the aggregate liability of the Guarantor under this deed shall not exceed the aggregate liability of the Subcontractor under the Subcontract, whether in contract (including warranty or indemnity), tort (including negligence or strict liability), statute, equity or any other extra-contractual theory.
9.2Notwithstanding anything to the contrary above, in the event of any claim under this Guarantee, the Guarantor shall be entitled to assert any defence, set-off or counterclaim that the Subcontractor could assert had such claim been made directly against any person under the Subcontract.
9.3Nothing in this deed is intended to render the Guarantor and the Subcontractor liable to the Contractor for the same loss twice.
As will be apparent, much of the contest between the parties relates to the relationship between cl 2, cl 3 and cl 9 of the Parent Company Guarantees.

The declarations sought

JKC commenced this application by way of a construction summons under O 58 r 10 of the Rules of the Supreme Court 1971 (WA). I ordered that the parties file pleadings in relation to the matter, so as to better identify any relevant factual context in which the declarations are sought and the precise terms of the declarations.
The form of declarations sought by JKC have undergone substantial change from the originating summons and the statement of claim. The final form of the declaration sought may be found in JKC's minute of amended proposed declarations dated 1 March 2019 (the Proposed Declarations). Those declarations are in the following terms:
(i)The Guarantors' liability under cl 3 of the PCGs is not, by reason of cl 2 and cl 9.2 of the PCGs, conditional on the determination of any defence, set-off or counterclaim asserted by the Guarantors;
(ii)cl 3 of the PCGs may be invoked in respect of obligations to pay money, including those under Article 50.5(c) of the Subcontract;
(iii)the right to invoke cl 3 of the PCGs does not cease upon the termination of the Subcontract;
(iv)the test as to the formation by JKC of a reasonable opinion for the purposes of cl 3 of the PCGs, is whether, at the time the opinion is formed, there exist facts that are sufficient to induce such a state of mind in a reasonable person;
…
The first Proposed Declaration[11] is, as I have indicated, the primary matter of legal dispute between the parties and encapsulates JKC's case that the guarantor's liability is not conditional on the determination of any defence, set-off or counterclaim. The other Proposed Declarations, for reasons that will become apparent, necessarily raise subsidiary issues.
[11] JKC accepted that the four matters in the declaration sought were properly characterised as four separate declarations (see ts 30 - 31).
It should at once be recognised, however, that the first Proposed Declaration does not quite capture the nature of the issue between the parties in this regard. That issue is not essentially concerned with whether there must be some form of determination before the guarantor's liability can arise. The guarantor either has a liability or it does not. The determination of that liability (where it is in dispute) is a separate matter.[12]
[12] JKC acknowledged in oral submissions that the focus of the first Proposed Declaration was concerned with whether or not there was an underlying liability, rather than the mechanism for determination (see ts 31 - 36).
The real issue is whether the guarantor's liability is dependent upon an actual liability on the part of the Subcontractor (as opposed to an alleged liability), such that the guarantor may raise any issue of defence, set-off or counterclaim in relation to it. For example, if, rather than seeking declarations, JKC had simply sued the defendants on the Parent Company Guarantees, would the defendants be able to raise, as a defence to such an action, that there was, in fact, no liability on the part of the Subcontractor (by reason of some defence or set-off)?

It will immediately be apparent from the form of the first Proposed Declaration that its construction refers to the guarantor's liability 'under cl 3 of [the Parent Company Guarantees]'. This is consistent with the relief originally sought on the originating summons which sought a declaration as to the 'proper construction of cl 3 of [the Parent Company Guarantees]'.
This is no mere formality of pleading, but rather reflects a fundamental difference between the parties. In that regard, JKC's case is that cl 3 of each Parent Company Guarantee creates a separate and independent liability on the part of the guarantor, in addition to the guarantee provided by cl 2 of the Parent Company Guarantee. The defendants, by contrast, contend that cl 3 is a 'mechanical provision' for the operation of cl 2 and does not operate separately and independently of cl 2. On the defendants' case, therefore, it is a category mistake to refer to the 'liability under cl 3 of the Parent Company Guarantee' at all. Rather, on the defendants' case, any liability of the guarantors arises under cl 2, when read with cl 9.
Before setting out the parties' respective cases in more detail, it is necessary to refer to two further documents that bear upon the construction of the Parent Company Guarantees: the Subcontract itself, and the terms of certain Bank Guarantees provided by the Subcontractor.
In this context, the parties accepted that the Parent Company Guarantees, the Subcontract and the Bank Guarantees should be read together for the purpose of ascertaining their proper construction and legal effect.[13] That position is, in my view, undoubtedly correct, especially as the form of both the Bank Guarantee and the Parent Company Guarantees are prescribed by, and form annexures to, the Subcontract itself.
[13] See ts 187; EDWF Holdings 1 Pty Ltd v EDWF Holdings 2 Pty Ltd (2010) 41 WAR 23 [104] (Buss JA, Owen & Newnes JJA agreeing).

The Subcontract

As noted above, by the Subcontract, the Subcontractor promised to JKC that it would perform the Works as part of the Ichthys Project. The Subcontract comprises a number of documents, including the General Terms and a series of exhibits, including a Scope of Work, Schedule of Compensation and Work Time Schedule.
Article 35 of the General Terms makes provision for the Bank Guarantees and Parent Company Guarantee. It commences as follows:
35Bank Guarantee(s) and Parent Company Guarantee
Subcontractor hereby agrees to provide irrevocable guarantee(s) provided by an Approved bank, insurance company or other financial institution (as the case may be) payable on first demand of Contractor and Parent Company Guarantees to guarantee the due performance of Subcontractor's obligations under the Subcontract as follows:
Article 35.1 and Article 35.2 deal with the Bank Guarantees and Parent Company Guarantees respectively.
Article 35.1, relevantly, provides:
35.1Bank Guarantees
(a)        Form of Bank Guarantees
(i)The Bank Guarantees must be provided by an Approved bank, insurance company or other financial institution (as the case may be) with a branch in Australia and with a Standard and Poor's rating of A- or better. The Bank Guarantees must be capable of being drawn upon and enforced by Contractor in Australia.
…
(iii)Each Bank Guarantee must contain an unconditional and irrevocable undertaking by the Approved bank, insurance company or other financial institution (as the case may be) to pay to Contractor the amount of the security on demand without notice being given to Subcontractor by the bank, insurance company or other financial institution (as the case may be) or Contractor. For the purposes of this sub‑Article 35.1, each pro forma in Annexure 1A (form of Bank Guarantee), is Approved.
…
(b)        Initial Amount of Bank Guarantee
The initial amount of the Bank Guarantee must be equal to 10% of the Subcontract Price and must be provided as two (2) Bank Guarantees, an Initial Bank Guarantee and a Warranty Bank Guarantee (collectively referred to as Bank Guarantees) each equal to 5% of the Subcontract Price).
(c)        Duration of Bank Guarantee
(i)The Initial Bank Guarantee must be valid from the Commencement Date until the effective date of the last Provisional Acceptance Certificate.
(ii)The Warranty Bank Guarantee must be valid from the Commencement Date until thirty (30) days after expiry of the last Warranty Period.
Article 35.2, relevantly, provides:
35.2Parent Company Guarantee
(a) Form of Parent Company Guarantee
Subcontractor must provide a Parent Company Guarantee executed by each Subcontractor Guarantor which must be in the specific form set out in Annexure 1B.
Article 35.3 makes specific provision in relation to demands on the Bank Guarantees:
35.3Demands
(a)Contractor may have recourse to the Bank Guarantee(s) at any time after giving Subcontractor five (5) days' prior written notice in order to recover any amounts that are payable by Subcontractor to Contractor on demand.
(b)Subcontractor waives any right that it may have to obtain an injunction or any other remedy or right against any party in respect of Contractor having recourse to the Bank Guarantee(s).
The proper construction of a provision in these terms, in the context of a call on a Bank Guarantee, was addressed in earlier proceedings in this Court in relation to a relevantly identical subcontract with another of JKC's subcontractors: see CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd[14] and CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [No 2].[15] I will return to those decisions later in these reasons.
[14] CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [2017] WASC 112.
[15] CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [No 2] [2017] WASCA 123 (CPB Contractors [No 2]).
There is no provision comparable to Article 35.3, in relation to the Parent Company Guarantees, in the Subcontract itself.
Article 35.4, which applies to both the Bank Guarantees and Parent Company Guarantees, provides:
35.4Proceeds of security
(a)If Contractor calls on a Bank guarantee or a Parent Company Guarantee at any time, the balance of the proceeds (if any) after deducting amounts due and payable to Contractor by Subcontractor must be deposited by Contractor into an interest bearing account with an Australian bank (as defined in the Corporations Act 2001 (Cth)) in the name of Contractor.
(b)Any interest accrued on the account balance must be retained by Contractor in the account and added to the balance of the proceeds held.
(c)Contractor is entitled to withdraw from the account amounts due and payable to it by Subcontractor from time to time.
(d)Neither Contractor nor the bank by whom the proceeds are held is to be deemed to hold the proceeds (or the balance thereof from time to time) on trust for Subcontractor, but Contractor must pay the balance in the account (if any), including all accrued interest to Subcontractor on the expiry of the Warranty Period.
As can be seen, the form of both the Bank Guarantees and the Parent Company Guarantees are prescribed in the Subcontract in Article 35.1(a)(iii) and Article 35.2(a) respectively.
The form of the Parent Company Guarantee, in Annexure 1B of the General Terms, is that set out in [15] above.
Before turning to the form of the Bank Guarantee, it is appropriate to refer to Article 50 of the General Terms (given its relevance to JKC's claims).
Article 50 relevantly provides:
50.2Rights of Contractor in case of Subcontractor's default
(a) If:
(i)Subcontractor fails to remedy its breach and/or default within the time specified in the notice given under sub‑Article 50.1(a); or
(ii)in Contractor's reasonable opinion, Subcontractor's breach of the Subcontract or default appears to be incapable of being remedied or being repaired within a reasonable period of time,
then the Contractor may, except as set out in sub‑Article 50.2(c) at any time and at its sole discretion:
(iii)direct Subcontractor to suspend performance of the Works wholly or in part;
(iv)terminate the Subcontract; or
(v)take-over uncompleted parts of the Plant and Result of Works.
…
50.4Completion of the works by Contractor
(a)If Contractor terminates the Subcontract or takes over the uncompleted parts of the Plant or Result of the Works under sub-Article 50.2(a), Contractor may, in its sole discretion, complete (or to have completed) any and all outstanding Works at Subcontractor's cost by whatever method it deems expedient, including the hiring of any other contractors and take‑over of Subcontractor's property in accordance with the provisions of sub‑Article 50.6.
…
50.5Basis for compensation of Subcontractor on termination or take‑over
(a)On the basis of the Approved progress reports and other means of evaluating the Works under the Subcontract, Contractor must determine the proportion of Works completed at the date of termination or take‑over.
(b)Subcontractor must immediately upon receipt of notice of termination reimburse Contractor any and all advance payments, on a pro rata basis, for all uncompleted Works.
(c)If Contractor's additional costs and expenses (including the expenses for completing the Works, the additional managerial expenses and administrative services and the costs resulting from hiring any other contractors) in completing the Works reasonably incurred due to such termination or takeover, are greater than the amount that would have been paid to Subcontractor if the Works had been completed by Subcontractor, Subcontractor must reimburse Contractor the amount by which the total cost exceeds the Subcontract Price within thirty (30) days of the receipt of the invoice from Contractor accompanied by all reasonable relevant supporting documents evidencing the costs and expenses incurred by Contractor over and above the Subcontract Price. This amount will be a debt due and payable from Subcontractor to Contractor.

As I have noted, at [7] - [9] above, JKC claims that the Subcontractor owes a series of debts pursuant to Article 50.5(c), in the form of Interim Cost Claims (the Cost Claims). Needless to say, the Cost Claims are very substantial and are a matter of dispute between JKC and the Subcontractor in the arbitration. It is those Cost Claims that are the subject of the Notices of Demand from JKC to the defendants.[16]

[16] The Cost Claims (exclusive of GST) may be summarised as follows:

Date of Claim	Amount AUD	Amount USD	Amount JPY	Amount EUR	Amount GBP
29.09.2017	61,978,353.62	621,959,127.00	315,465.00	111,312.14
14.02.2018	364,325,919.07	1,193,769,862.00	193,192.36	193,778.99
01.05.2018	235,870,319.80	1,107,311.01	529,915,186.00	1,081,871.23	52,404.28
24.07.2018	256,006,280.91	8,698,111.72	327,864,212.00	763,532.99	55,387.72
18.10.2018	256,027,015.84	6,880,614.19	338,755,589.00	426.26	201,470.03
08.01.2019	339,217,767.00	230,239,265.00	146,579.00	89,269.00

The Notice of Demand to the defendants dated 27 July 2018 related to the First, Second and Third Cost Claims. The Notice of Demand to the defendants dated 2 November 2018 related to the Fourth Cost Claims.

The Bank Guarantees

The form of approved Bank Guarantee prescribed by Article 35.1 is found in Annexure 1B of the General Terms.
The Bank Guarantee relevantly includes the following provisions:
2.The [Bank/Insurance Company/Provider] hereby irrevocably and unconditionally undertakes to pay to the Contractor, forthwith upon receipt of a written demand signed or purportedly signed by the Contractor (or by the nominated representative of the Contractor for and on its behalf), any amount specified in such demand, which when aggregated with all such amounts previously paid under this document does not exceed the Guaranteed Amount.
3.The [Bank/Insurance Company/Provider]'s obligation to make payment under this document shall arise on receipt of a demand, made in accordance with the provisions of this document without proof of any breach of any other conditions and notwithstanding any contest or dispute by the Subcontractor. The [Bank/Insurance Company/Provider] shall not be required or permitted to make any other investigation or enquiry or notify the Subcontractor prior to the satisfaction of the demand.
…
6.The obligations of the [Bank/Insurance Company/Provider] under this document act as primary obligor and not by way of surety. The [Bank/Insurance Company/Provider] shall not be entitled as against the Contractor to make any withholding or deduction on account of any set‑off or counterclaim whatsoever and howsoever arising.
The Bank Guarantees provided in accordance to the Subcontract are in evidence before me (Exhibit 3). They are in the form prescribed by Annexure 1B of the General Terms.
The form of Bank Guarantee considered in CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd and CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [No 2] was also in relevantly the same terms.[17]
[17] Clauses 2, 3 and 6 of the pro forma Bank Guarantee the subject of those decisions are set out in CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [2017] WASC 112 [10] (Le Miere J).
In those decisions Le Miere J and the Court of Appeal held that on a proper construction of the Subcontract, including the pro forma Bank Guarantee, the purpose of the provisions relating to the Bank Guarantee was to ensure that JKC would have the funds during a dispute between the parties and that Article 35.3(a) did not contain a negative stipulation that JKC would not demand payment under the Bank Guarantees unless an amount was actually, objectively or indisputably payable by the subcontractor to JKC.[18]
[18] CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [2017] WASC 112 [81] - [82] (Le Miere J) and CPB Contractors [No 2] [128] - [131] (Buss P, Murphy & Beech JJA).
JKC's construction of the Parent Company Guarantees, it submits, leads to the same result, namely that upon:
(a)the formation (by it) of a reasonable opinion that the Subcontractor has failed to discharge its liabilities under the Subcontract; and
(b)the receipt of written notice by the guarantors,
the guarantors must pay the full amount of the Cost Claims, regardless of whether those claims are actually owed or whether the Subcontractor has a good defence, set-off or counterclaim to them.
It is to the parties' respective constructions that I now turn. At this point I am concerned only to identify the constructions themselves, rather than the entirety of the submissions proffered by the parties in support of those constructions.

JKC's construction of the Parent Company Guarantees

As I have noted above, JKC's construction starts with the proposition that cl 3 of the Parent Company Guarantees creates rights and obligations that are distinct from those created under the guarantee in cl 2.
Indeed, JKC submits that cl 3 of the Parent Company Guarantees is not a guarantee; rather, 'it is or is analogous to a performance bond'.[19] In this context, JKC submits that the heading to cl 3 (i.e. 'Guarantor to perform') is merely the label for the defined parent entity. [20]
[19] JKC's submissions as to Operation of Parent Company Guarantees dated 29 January 2019 [45].
[20] JKC's submissions as to Operation of Parent Company Guarantees dated 29 January 2019 [49].
As cl 3 creates an independent obligation distinct from cl 2, on JKC's construction, cl 3 is not subject to cl 9.2 of the Parent Company Guarantees and so not subject to any defence, set-off or counterclaim that the Subcontractor could assert in relation to the relevant alleged liability.
Accordingly, on JKC's construction, upon the formation (by JKC) of a reasonable opinion that the Subcontractor has failed to discharge its liabilities under the Subcontractor and written notice, the guarantors must meet the liability so identified in the notice (regardless of whether the liability actually exists). In other words, the formation of the 'reasonable opinion' is conclusive of the guarantor's liability under cl 3.
Underlying this central proposition (namely that cl 3 of the Parent Company Guarantees is, in truth, a performance bond) is what JKC identifies as the evident commercial purpose of cl 3. JKC submits that the purpose of cl 3 is to serve as a 'risk allocation device': that is, to ensure that JKC 'would be "in the money" pending the determination of any dispute between JKC and the Subcontractor'.[21]
[21] JKC's submissions as to Operation of Parent Company Guarantees dated 29 January 2019 [5].
Clause 9.2, on JKC's construction, has no application to the distinct obligations created by cl 3, which (unlike cl 2 and cl 6.5) is not expressed to be 'subject to Clause 9'. Moreover, JKC contends that while cl 9.2 itself commences with the words 'notwithstanding anything to the contrary above', it only applies to a claim 'under this Guarantee' and, according to JKC's construction, cl 3 is not a 'Guarantee'.
JKC's construction recognises, as it must, that the guarantors' ultimate liability under the Parent Company Guarantees cannot exceed that of the Subcontractor. That 'ultimate' liability, on JKC's construction, must come through cl 2, which is subject to cl 9.2 (and therefore any defence, set-off or counterclaim that the Subcontractor could assert). In this context, JKC also relied upon cl 6.3 and cl 9.1 as fixing the 'boundaries' of JKC's ultimate liability. [22]
[22] JKC's submissions as to Operation of Parent Company Guarantees dated 29 January 2019 [63] - [66].
Accordingly, while cl 3 was identified by JKC as creating a separate and independent obligation to pay, it was nevertheless subject to the 'ultimate' liability created by cl 2.[23]
[23] See ts 63 - 64.
In its submissions, JKC represented this ultimate 'accounting' or 'reckoning', diagrammatically, as follows:
It may be noted that this particular illustration reflects a case in which, as in the present case, the Subcontract has been terminated and, also, in which a dispute between JKC and the Subcontractor has been submitted to arbitration. That, of course, may not necessarily be the case in all of the circumstances in which the Parent Company Guarantees might be called upon. For example, there may be circumstances in which there is a claim under the Parent Company Guarantees during the currency of the Subcontract, and also where there is no arbitration between JKC and the Subcontractor.[24]
[24] Indeed, as the closing sentence of cl 3 itself makes clear, the Contractor is not required to enforce its rights against the Subcontractor before having recourse to the Parent Company Guarantee.
This raises another aspect of JKC's construction, which relates to the closing words in the first paragraph of cl 3 that the guarantor is required to 'continue to perform those obligations and discharge those liabilities (as the case may be) until the termination of the Subcontract by the effluxion of time or otherwise'.
At least prima facie, these words appear to create an obstacle to JKC's construction as depicted above, and in particular to cl 3's application in a case such as the present where the Subcontract has, on any view, been terminated. The words, prima facie, appear to contemplate that any liability of the guarantor under cl 3 will cease upon termination of the Subcontract.[25]
[25] In addition, of course, on such a construction they could not be engaged after the termination of the Subcontract.
In this regard, JKC contends that the words 'or otherwise' in the closing words of cl 3 (paragraph 1) attach to the word 'until', rather than to the words 'termination of the Subcontract'. That is, JKC contends that, on its proper construction cl 3 should be read as if punctuated as follows: [26]
[continue performing] … until:
(i)the termination of the Subcontract by the effluxion of time; or
(ii)otherwise.
[26] JKC's submissions as to Operation of Parent Company Guarantees dated 29 January 2019 [87].

It is this aspect of JKC's construction that forms the basis of the third of the Proposed Declarations.[27]
[27] See [18] above.
The next aspect of JKC's construction to note is the one reflected in the second of the Proposed Declarations, namely that cl 3 of the Parent Company Guarantees may be invoked in respect of obligations to pay money, including obligations under Article 50.5(c) of the Subcontract. JKC's construction of cl 3 is that it applies to all obligations and liabilities under the Subcontract, including the obligation to pay sums of money. In this regard, JKC emphasises the word 'any', as it appears in cl 3 in the phrases 'any of the Subcontractor's obligations' and 'discharge any of the Subcontractor's liabilities'.[28]
[28] JKC's submissions in Reply dated 1 March 2019 [38].
The final aspect of JKC's construction to note is its approach to the requirement for a 'reasonable opinion' on JKC's part. Consistent with its construction of cl 3 as a whole, JKC contends that the expression 'reasonable opinion' is intended to create a lower standard than a wholly objective standard (for example, that a liability is actually owed). [29]
[29] JKC's submissions as to Operation of Parent Company Guarantees dated 29 January 2019 [80].
In this respect, JKC contends, the requirement for the formation, by JKC, of a reasonable opinion 'must have work to do' and that if it was merely a precondition, and that failure by the Subcontractor had to be established or admitted, the requirement would be otiose. [30]
[30] JKC's submissions as to Operation of Parent Company Guarantees dated 29 January 2019 [77].
The final declaration set out in the Proposed Declarations seeks to declare the test to be applied as to the formation of a 'reasonable opinion' under cl 3 of the Parent Company Guarantees.
Turning, then, to the defendants' construction.

Defendants' construction of the Parent Company Guarantees

The defendants' construction of the Parent Company Guarantees starts from the proposition that that cl 3 is a 'mechanistic provision' for the operation of cl 2 and does not operate separately and independently of cl 2.[31] That is, the guarantors' substantive obligation to guarantee the due performance by the Subcontractor is that (and only that) created by cl 2 of the Parent Company Guarantee, whereas cl 3 is a procedural provision providing the mechanism by which (certain) obligations under cl 2 may be activated.
[31] ts 110, 115.
In this regard, the defendants contend, that cl 2, cl 3 and cl 9.2 are all to be read together, such that any obligation of the defendants is, on a proper construction of the Parent Company Guarantees, expressly subject to any defence, set-off or counterclaim available to the Subcontractor.[32]
[32] Defendants' submissions dated 19 February 2019 [3].
The express provisions of cl 9.2 entitling the guarantor to assert any defence, set-off or counterclaim available to the Subcontractor, on the defendants' construction, apply to the entirety of the Parent Company Guarantee (that is, to the whole document). In that regard, the defendants rely upon the reference in cl 9.2 to its application to 'any claim under this Guarantee'.[33] The self-referential pronoun 'this', the defendants submit, can only be referring to the document (the whole of the Parent Company Guarantee) itself.
[33] Defendants' submissions dated 19 February 2019 [51] - [52].
It follows from this construction (which emphasises the primacy of cl 9.2), [34] that the purpose of cl 3 is not to be a 'risk allocation' device as to which party should be out of pocket while a dispute is determined. Rather, the defendants submit, the Parent Company Guarantee, as a whole, has the purpose expressed in Article 35 of the Subcontract, namely to 'guarantee the due performance of Subcontractor's obligations under the Subcontract'. That purpose, as the authorities relied upon by the defendants suggest, does not by itself support a 'pay now, argue later' operation to the Parent Company Guarantees.
[34] Defendants' submissions dated 19 February 2019 [1], [49] - [50].
By this construction, the defendants contend, the Parent Company Guarantees, in every respect, are truly in the nature of guarantees dependent upon actual default and are not performance bonds.[35]
[35] Defendants' submissions dated 19 February 2019 [46] - [48].
The defendants also raise a number of subsidiary matters in relation to the construction and operation of cl 3. I have described these as 'subsidiary' matters because, on the defendants' construction, cl 3 is a mechanical or procedural provision regardless of the correctness, or otherwise, of these matters.[36] As will be apparent, the subsidiary matters are related.
[36] ts 148.
The first subsidiary matter is that, on the defendants' construction, cl 3 is only concerned with the guarantor's obligation to 'perform' the obligations in the Subcontract (i.e. to carry out the Works), in place of the Subcontractor, and not with payment obligations.[37] That is, on the defendants' construction, cl 3 is only concerned with the circumstance in which the guarantor takes over the actual performance of the Subcontract (i.e. the carrying out of the Works).
[37] Defendants' submissions dated 19 February 2019 [30] - [36].
In this regard, the defendants rely upon the distinct sub-clauses in cl 2, and in particular the distinction between:
(a)the 'discharge of the obligations and liabilities of the Subcontractor', referred to in cl 2(a); and
(b)the 'payment of any amounts due and unpaid under the Subcontract', referred to in cl 2(b).
The defendants refer to the apparent symmetry between the use of the phrase 'discharge of the obligations and liabilities of the Subcontractor' in cl 2(a) and the phrase 'perform any of the Subcontractor's obligations or discharge any of the Subcontractor's liabilities' in cl 3. In that regard, the defendants note, cl 3 makes no reference to 'payment of any amounts due and unpaid' (i.e. the matter referred to in cl 2(b)).
In this way, on the defendants' construction, cl 3 does not cover a failure by the Subcontractor to 'pay'.[38]
[38] Defendants' submissions dated 19 February 2019 [33].
The second subsidiary matter raised by the defendants relates to the closing words in the first paragraph of cl 3. The defendants contend that the plain and natural meaning of the words 'continue to perform those obligations and discharge those liabilities … until the termination of the Subcontractor by the effluxion of time or otherwise' is that the obligations covered by cl 3 do not operate after termination of the Subcontract. Nor, for that reason, can cl 3 be relied upon if the Subcontract has already been terminated.[39]
[39] Defendants' submissions dated 19 February 2019 [41] - [42].
In this regard, the defendants contend that JKC's construction of the closing words in the first paragraph of cl 3 would lead to the unnatural and discordant construction that it would read: 'continue to perform … until otherwise'. [40]
[40] Defendants' submissions dated 19 February 2019 [78].
It will be apparent how these two subsidiary aspects of the defendants' construction are related. As, on this construction, cl 3 is concerned only with 'performance' of the Subcontract (i.e. when the guarantor is required to 'step in' and taken over the performance of the Subcontract) it could only operate (and does only operate) while the Subcontract remains in operation, and where further performance by the Subcontractor is required.
By contrast, in circumstances in which the Subcontract has been terminated, while the Subcontractor may (depending upon the circumstances, including which party validly terminated the Subcontract) be liable to make payments (either by way of damages or debt), the Subcontractor is no longer required to perform the Works under the Subcontract. In such a case, on the defendants' construction, cl 3 would have no work to do. The guarantor's obligation to guarantee the payment of any sums due under the Subcontractor will be determined by cl 2 alone.
The final matter to note, in relation to the defendants' construction, is their approach to the requirement for a 'reasonable opinion' under cl 3. In that regard, the defendants contend that the requirement for the formation of a 'reasonable opinion' on the part of JKC is for the benefit the guarantors. That is, the defendants contend that the commercial purpose of the requirement for the formation of a reasonable opinion by JKC, is to ensure that JKC must have a reasonable basis before it can call upon the guarantors to take over performance of the Subcontract. Otherwise (particularly given that JKC is not required to enforce its rights against the Subcontractor before having recourse to the Parent Company Guarantees) JKC could, in its uncontrolled discretion, treat the guarantors as the Subcontractor.[41]
[41] ts 123 - 124.
With these summaries of the parties' alternative constructions of the Parent Company Guarantees, I turn to the law to be applied in arriving at my preferred construction.

Contractual construction in the context of Guarantees and Bonds

The general principles in relation to the construction of commercial contracts are not contentious. As the plurality in Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd confirmed:
The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean … As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding 'of the genesis of the transaction, the background, the context [and] the market in which the parties are operating.' … [U]nless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption 'that the parties … intended to produce a commercial result'. A commercial contract is to be construed so as to avoid it 'making commercial nonsense or working commercial inconvenience.'[42]
[42] Electricity Generation Corporation t/asVerve Energy v Woodside Energy Ltd (2014) 251 CLR 640 [35] (French CJ, Hayne, Crennan & Kiefel JJ) (Verve Energy). See also Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 [51] (French CJ, Nettle & Gordon JJ) (Mount Bruce Mining).
This is, of course, an objective exercise, which 'depends on finding the meaning of the language of the contract'[43] and 'what each party by words and conduct would have led a reasonable person in the position of the other party to believe'.[44] As French CJ, Nettle & Gordon JJ observed in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd:[45]
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.
[43] Byrnes v Kendle (2011) 243 CLR 253 [98] (Heydon & Crennan JJ).
[44] Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 165, [40] (Gleeson CJ, Gummow, Hayne, Callinan & Heydon JJ). See also Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544, [16] (Kiefel, Bell & Gordon JJ).
[45] Mount Bruce Mining [46] (French CJ, Nettle & Gordon JJ).
Where a commercial transaction is implemented by several documents, all of the documents may be read together for the purpose of ascertaining their proper construction and legal effect.[46] As I have already noted above, the parties accepted that this principle properly applies to the Parent Company Guarantees, the Subcontract and the Bank Guarantees.
[46] EDWF Holdings 1 Pty Ltd v EDWF Holdings 2 Pty Ltd (2010) 41 WAR 23 [104] (Buss JA, Owen & Newnes JJA agreeing).
In the present case, the parties also referred to a number of decisions concerning the construction of a variety of guarantees and performance bonds. While these authorities provide some assistance, they must be understood (and if necessary modulated) by reference to the controlling effect of the general principles referred to above.
The cases relied upon by the parties fall into two broad categories.
First, JKC referred to cases in relation to 'performance bonds' (i.e. unconditional promises to pay on demand) emphasising the independent or autonomous nature of such bonds. That is, an unconditional promise to 'pay on demand' is independent of any underlying transaction and any other contract:[47] such instruments 'by their nature, stand alone'.[48] Accordingly, to hold that such an instrument requires the promisor to enquire into the rights of the parties under the contract (between the promisee and other party) to which the promisor is not a party would be inconsistent with the ordinary meaning of the undertaking.[49]
[47] Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85 [6] - [8] (French CJ) (Simic).
[48] Simic [6] - [8] (French CJ), [85] (Gageler, Nettle & Gordon JJ).
[49] Wood Hall Ltd v Pipeline Authority (1979) 141 CLR 443, 445 (Barwick CJ), 451 (Gibbs J) (Wood Hall).
That a 'performance bond', properly so described, operates in this way is uncontroversial. The real issue in the present case is whether the Parent Company Guarantees, properly construed, are instruments of this kind.
This raises the second category of case referred to by the parties: those which identify matters of text, context and purpose relevant to whether such a construction should be reached.
In that regard, in so far as purpose is concerned, the authorities direct attention to two broad purposes for which a guarantee might be required:
(a)to provide security; and
(b)as a risk allocation device (pending resolution of a dispute).
The distinction between the two purposes was usefully described by Calloway JA in Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd:[50]
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 moneys and the like, the latter purpose is often present and commercial practice plays a large part in construing the contract.
[50] Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812, 826 - 827. See also Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd (2008) 249 ALR 458 [75] - [85] (French, Jacobson & Graham JJ); Sugar Australia Pty Ltd v Lend Lease Pty Ltd [2015] VSCA 98 [20] (Osborn & Ferguson JJA).
As is apparent from this passage, the issue of construction will generally concern whether the 'risk allocation' purpose is an additional purpose. The security purpose will generally always be present. As Calloway JA observed, the question is whether a purpose of the guarantee is 'also as a risk allocation device'.
With one qualification, I agree with Calloway JA's identification of the relevant issue. The qualification is this: in a case such as the present, the identification of purpose it is not solely (or even primarily) a matter of construction of the 'underlying contract' (by which his Honour refers to the contract in which the guarantee is stipulated for; in this case, the Subcontract). Rather, at least as between guarantor and the beneficiary, it is a matter of construction of the guarantee itself, although the underlying contract will provide important context and, in a case such as the present, they should be read together.
The reason for the qualification lies in the different nature of this case and in the differing identity of the parties. In Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd, Calloway JA was dealing with a dispute as between the initial contracting parties (which, in this case, would be JKC and the Subcontractor), as to whether the beneficiary had contractual obligations not to call upon the guarantee unless certain conditions were met. In such cases, the entitlements under the underlying contract will be determinative.[51] The present case is not concerned with JKC's rights, as against the Subcontractor, to call on the Parent Company Guarantees; rather, it is concerned with JKC and the defendants' rights, vis-a-vis each other, under the Parent Company Guarantees.
[51] In such a case, the guarantor (usually a bank) is not a party. This was the position in Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd, Sugar Australia Pty Ltd v Lend Lease Pty Ltd and Universal Publishers Pty Ltd v Australian Executor Trustees Ltd [2013] NSWSC 2021 (Universal Publishers). This was made clear in this State by the Court of Appeal in CPB Contractors [No 2] [89].
In either case, however, whether a particular instrument has, as one of its purposes, risk allocation pending a dispute, is a matter to be discerned as a matter of contractual construction. It is not a matter, as the defendants emphasised in submissions, to simply be assumed.
The defendants identified the decision of Universal Publishers as illustrative of this approach.[52] In that case, White J was dealing with an injunction application by the plaintiff to prevent the defendant (its former lessor) from calling upon a guarantee provided by Westpac (it was, again, a case involving a bank guarantee).
[52] Each party made submissions in relation to Universal Publishers, seemingly because it was relied upon before, and discussed by, the arbitrators in relation to an application before them that JKC be restrained from calling upon the Bank Guarantee (Exhibit 8). Universal Publishers, while illustrative of the process of construction, does not create any new principle.
White J identified the issue in that case in the following way:[53]
Whether the purpose of the provision of the performance bond in the form of the banker's undertaking is only to provide security for the performance of the lessee's contractual obligations, or whether the purpose is also to allocate the risk as to who should be out-of-pocket pending resolution of a dispute, is a conclusion to be drawn from the construction of the lease.
[53] Universal Publishers [16] (White J). Again, Universal Publishers was concerned with whether the defendant should be restrained from calling upon the bank guarantee (not an application against the bank itself).
In this context, his Honour identified the express purpose set out in the lease:[54]
Clause 19.1 provides that the purpose of the unconditional Bank Guarantee is to secure the lessee's obligations under the lease and losses and damages suffered by the lessor pursuant to a breach of the lease by the lessee or termination of the lease arising from such a breach. That is an express statement as to the purpose of the provision of the security.
[54] Universal Publishers [18] (White J).
In light of this express statement, White J concluded:[55]
In this case, clause 19.1 expressly provides that the purpose of an unconditional bank guarantee is to provide security for the lessee's performance of its obligations. No further purpose for the security is identified. In my view, the clause does not provide for an allocation of the risk as to who should be out of pocket whilst a dispute as to the lessee's asserted breach is determined.
[55] Universal Publishers [60] (White J). White J also relied upon the provisions of the lease (in cl 19.4) as to the circumstances as to when the security can be called upon.

As will be seen, the defendants in this case submit that cl 19.1 in Universal Publishers finds a direct analogy in the opening sentence of Article 35 of the General Terms.
The defendants also submit that the 'risk allocation' purpose is one that is generally only to be found in performance bonds or guarantees issued by banking institutions. In that regard, they contend for a presumption against construing an instrument as a true 'performance bond' (i.e. unconditional promises to pay on demand) outside the banking context.
The defendants rely, in this regard, on the decision of the Court of Appeal of England and Wales in Marubeni Hong Kong and South China Ltd v Mongolian Government (Marubeni).[56]
[56] Marubeni Hong Kong and South China Ltd v Mongolian Government [2005] 1 WLR 2497 (Marubeni).
Marubeni concerned a letter of 'guarantee'[57] from the Mongolian Minister of Finance issued to the appellant, in consideration for the appellant entering into a supply agreement with a Mongolian company. The letter included the following language:[58]
… the undersigned Ministry of Finance of Mongolia unconditionally pledges to pay to you upon your simple demand all amounts payable under the agreement if not paid when the same becomes due (whether at stated maturity, by acceleration or otherwise) and further pledges the full and timely performance and observance by the buyer of all the terms and conditions of the agreement.
[57] The instrument itself did not use the word 'guarantee', although it was described in that way by the primary contract and in an accompanying letter containing a legal opinion from the Deputy Minister for Justice of Mongolia: Marubeni [2].
[58] Marubeni [4] (Carnwarth LJ; Sir Martin Norse & Waller LJ agreeing).
Having reviewed the authorities in relation to 'performance bonds' or 'demand bonds', Carnwath LJ observed:[59]
In all these cases the documents were issued by banks and were described as, or assumed to be, performance bonds. Not surprisingly the courts interpreted them against the background of the law relating to such instruments. They provide no useful analogy for interpreting a document which was not issued by a bank and which contains no overt indication of an intention to create a performance bond or anything analogous to it.
[59] Marubeni [28] (Carnwath LJ; Sir Martin Norse & Waller LJ agreeing).
In construing the letter in that case, his Lordship commenced by observing that:[60]
[I]f [the appellant] had wanted the additional security of a demand bond, one would have expected them to have insisted on appropriate language to describe it, in both the instrument itself, and in the legal opinion. The absence of such language, in a transaction outside the banking context, creates in my view a strong presumption against [the appellant's] interpretation. (emphasis added)
[60] Marubeni [30] (Carnwath LJ; Sir Martin Norse & Waller LJ agreeing).
That presumption, Carnwath LJ concluded, was not rebutted by the wording of the letter. In particular, his Lordship observed that the words 'unconditionally pledges' and 'simple demand' were qualified by the words that followed, which were appropriate to a secondary obligations, conditional upon default.[61]
[61] Marubeni [31] (Carnwath LJ, Sir Martin Norse & Waller LJ agreeing).
The presumption, outside the banking context, identified in Marubeni was applied by Sir William Blackburne in Vossloh Aktiengesellschaft v Alpha Trains (UK) Ltd.[62] Significantly, for present purposes, Vossloh concerned a parent company guarantee. The claimant, Vossloh, was the parent of the Vossloh group of companies, members of which had contracted with the Alpha Trains group for the supply of locomotives.
[62] Vossloh Aktiengesellschaft v Alpha Trains (UK) Ltd [2011] 2 All ER (Comm) 307 (Vossloh).
The guarantee in Vossloh had certain features similar to the Parent Company Guarantees (as well as, not surprisingly, features that differ).
For example, the guarantee in Vossloh provided: [63]
2.1In consideration of the Angel Trains Group placing orders under any Call-Off Notice the Guarantor hereby unconditionally and irrevocably as a continuing obligation and as principal debtor and not merely as surety, as a separate, continuing and primary obligation:
…
(b)guarantees to each Beneficiary the due and punctual payment by each Guaranteed Party of all of its Secured Obligations;
[63] Vossloh [35] (Sir William Blackburne).
This provision finds certain echoes in the Parent Company Guarantees in this case, in particular in cl 2, cl 5 and cl 6.1. By contrast, the guarantee in Vossloh did not contain a provision in similar terms to cl 3 of the Parent Company Guarantees, nor a provision in similar terms to cl 9.2.[64]
[64] The entitlement to raise defences under the guarantee in Vossloh arose after compliance with cl 2.1 (see cl 6.4 at Vossloh [35]).
Sir William Blackburne concluded that the guarantee in Vossloh was not in the nature of a demand or performance bond. In so construing the instrument, Sir William relied upon the 'strong presumption' against the existence of such a construction outside the banking context, referring to Marubeni.[65]
[65] Vossloh [30], [53] (Sir William Blackburne).
Notwithstanding the identification of a presumption in these cases, the parties referred to a number of examples of a guarantee being construed as a performance or demand bond outside the banking context (i.e. cases in which the 'presumption' was rebutted).
For example, in IIG Capital LLC v Van De Merwe (IIG Capital),[66] the Court of Appeal concluded that a guarantee given in relation to a loan agreement by the shareholders of the borrower was in the nature of a demand bond. While Waller LJ recognised the presumption against the guarantee being a demand bond, his Lordship concluded that the operative language of the guarantee, including a provision that a certificate in writing as to the amount owing being 'conclusive and binding on the Guarantor for the purposes hereof', rebutted any presumption.[67]
[66] IIG Capital LLC v Van De Merwe [2008] EWCA Civ 542 (IIG Capital).
[67] IIG Capital, [30] – [32] (Waller LJ, Collins & Rimer LJJ agreeing).
Similarly, Multiplex Construction Europe Ltd v Gordon Alan Dunne (Multiplex) was concerned with a guarantee given by the defendant, Mr Dunne, to the plaintiff, Multiplex, under an Advance Payment Deed.[68] Under the Deed, Mr Dunne guaranteed that he would repay to Multiplex an advance payment of £4 million made by Multiplex to Mr Dunne's engineering company (DBCE), should the latter suffer an event of insolvency. [69]
[68] Multiplex Construction Europe Ltd v Gordon Alan Dunne [2017] EWHC 3073 (Multiplex).
[69] Multiplex [15] (Fraser J).
The guarantee in Multiplex provided that, should DBCE suffer an event of insolvency, Mr Dunne would 'immediately' be liable to Multiplex for the payment of the Advance Payment. Fraser J concluded that, particularly in the context where the trigger was insolvency, an 'immediate' obligation would not be possible if any sort of accounting were required with DBCE or if the primary obligation rested with DBCE.[70] For those reasons, Fraser J concluded, Mr Dunne was not entitled to rely upon any set-offs or counterclaims of DBCE. [71]
[70] Multiplex [42] (Fraser J).
[71] Multiplex [47] - [50] (Fraser J).
Finally, in this context, JKC referred to Catalyst Business Finance Ltd v Very Tangy Television Ltd.[72] As in IIG Capital, that case concerned a personal guarantee given by the second defendant, Mr Tucker, in relation to a loan by his corporate vehicle, the first defendant. Jefford J concluded that the personal guarantee was a primary obligation to repay the amounts loaned under the loan agreement and, as was also the case in IIG Capital, the certificate of indebtedness was conclusive.[73]
[72] Catalyst Business Finance Ltd v Very Tangy Television Ltd [2018] EWHC 1699 (QB) (Catalyst Business Finance).
[73] Catalyst Business Finance [30], [47] (Jefford J).
Each of these authorities, beginning with Marubeni, amply demonstrate (were any further demonstration needed) that each case will depend upon the particular language and text of the instrument in question, having regard to its context and purpose. They provide useful illustrations of the relevant task of construction.
I do not, however, accept the notion that there is any form of 'presumption' in relation to the construction of instruments such as the Parent Company Guarantees. Insofar as Marubeni, and the cases that followed it, are authority for the proposition that there is a special rule of construction or legal 'presumption' in such a case, in my view they do not represent the law in Australia.
The notion of there being some form of presumption, arising from the nature of a performance bond, or indeed, as to whether a particular instrument should be characterised as a performance bond, is in my view, against the trend of Australian authority in relation to the construction of commercial contracts generally. That trend, exemplified by the above extract from the plurality in Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd,[74] eschews reliance upon presumptions generally, in favour of attention the particular text, context and purpose.[75]
[74] Verve Energy [35] (French CJ, Hayne, Crennan & Kiefel JJ).
[75] See e.g. in the insurance context: Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522 [16] - [17] (Gleeson CJ, McHugh, Gummow & Kirby JJ) (Wilkie). See also Carter JW, The Construction of Commercial Contracts (2013) [16-05].
For this reason in Kawasaki Heavy Industries, Ltd v Laing O'Rourke Australia Construction Pty Ltd (Kawasaki), in the context of performance bonds (so-called), the New South Wales Court of Appeal rejected the proposition that there was any special rule of construction in relation to such bonds.[76] In reaching that conclusion, the court in Kawasaki relied upon the approach taken by the Court of Appeal in this State in CPB Contractors [No 2].[77]
[76] Kawasaki Heavy Industries, Ltd v Laing O'Rourke Australia Construction Pty Ltd [2017] NSWCA 291 [60] - [67] (Meagher, Payne & White JJA) (Kawasaki).
[77] CPB Contractors [No 2], [87] - [89] (Buss P, Murphy & Beech JJA).
I recognise that the 'special rule of construction' contended for in Kawasaki was a presumption in favour of an unfettered right to call on a bond (in a banking context) as opposed to the presumption in Marubeni, which would have the opposite effect (outside the banking context). Nevertheless, the principle is the same: the effect of the instrument must be justified by an orthodox process of construction of the relevant language, rather than by recourse to a 'presumption'.[78]
[78] Kawasaki [67] (Meagher, Payne & White JJA).
This is not to say that the line of cases commencing with Marubeni are of no utility. As I have said, the construction to be placed on the instrument will be affected by all aspects of the relevant commercial context, including the identity and nature of the guarantor and the nature of the obligations the subject of the guarantee.
So, for example, the fact that the issuing or accepting institution of a particular guarantee or bond is a bank (or other financial institution) may be an important matter of context. A financial institution, for example, with no interest in the underlying contract may be expected to be more likely to assume 'pay on demand' obligations without reference to actual default by the contracting parties. In such circumstances, a 'risk allocation' purpose may more readily be discerned.
Similarly, the nature and extent of the obligations guaranteed will also be relevant text and context. In the cases referred to above in which a guarantee was held to be in the nature of a demand bond outside of the banking context,[79] each was concerned with loan agreements (or, in the case of Multiplex, the repayment of an advance payment) for specific amounts.
[79] IIG Capital, Multiplex and Catalyst Business Finance.
An obligation to pay a specified sum of money loaned or advanced to a related party of the guarantor provides a different context to the Parent Company Guarantees, which are expressed to apply to all obligations of the Subcontractor. They include obligations to perform the Subcontract, with no financial limit (beyond that of the Subcontractor's liability). The extent and duration of an instrument of guarantee (or similar instrument) will therefore be relevant to its construction.
No single matter of context is, of course, determinative. What is required is consideration of all the matters identified in Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd.[80]
[80] Verve Energy [35] (French CJ, Hayne, Crennan & Kiefel JJ).
In that light, I turn to my preferred construction of the Parent Company Guarantees. In that regard, I commence with the primary matter of dispute: does cl 3 of the Parent Company Guarantees create a 'pay now, argue later' obligation that is not subject to any defence, set‑off or counterclaim available to the Subcontractor? That matter is, of course, the subject of the first Proposed Declaration.

Do the Parent Company Guarantees create a 'Pay Now, Argue Later' obligation?

For the reasons which follow, the Parent Company Guarantees, on their proper construction, do not create a 'pay now, argue later' obligation. Rather, the defendants are entitled to assert any defence, set-off or counterclaim to a claim under the Parent Company Guarantees, including the claims made in the Notices of Demand.
It follows from this overall conclusion that I find that:
(a)the purpose the Parent Company Guarantees is to provide security and not as a risk allocation device (pending resolution of a dispute);
(b)clause 9.2 applies to the Parent Company Guarantees as a whole; and
(c)clause 3 of the Parent Company Guarantees is a 'mechanistic provision' for the operation of cl 2 and does not operate separately and independently of cl 2.
The reason for these conclusions are, of course, interrelated.
In relation to the purpose of the Parent Company Guarantees, I begin with reference to the Subcontract itself. The opening words of Article 35 of the General Terms include what may properly be regarded as statements of purpose:
Subcontractor hereby agrees to provide irrevocable guarantee(s) provided by an Approved bank, insurance company or other financial institution (as the case may be) payable on first demand of Contractor and Parent Company Guarantees to guarantee the due performance of Subcontractor's obligations under the Subcontract … (emphasis added)
There is some ambiguity as to whether the words 'to guarantee the due performance of Subcontractor's obligations under the Subcontract' apply to both the Bank Guarantees and the Parent Company Guarantees (i.e. they qualify all of the preceding words) or whether they only apply to the Parent Company Guarantees.
Nevertheless, what is clear is that the words 'payable on first demand of Contractor' are only capable of applying to the Bank Guarantees. It is not possible to read the opening words of Article 35, in effect, as saying 'Parent Company Guarantees payable on first demand of the Contractor'. Such a reading would be quite ungrammatical. As a textual matter, therefore, only the second 'statement of purpose' can apply to the Parent Company Guarantees.
This is relevant for two reasons.
First, the statement that does qualify the Parent Company Guarantees ('to guarantee the due performance of Subcontractor's obligations under the Subcontract') does not, itself, support a 'risk allocation' purpose. In this respect it is, in my view, to the same effect as the statement of purpose in the guarantee in Universal Publishers ('to secure the Lessee's obligations under this Lease').
In that case, White J held that such a statement of purpose 'does not provide for an allocation of the risk as to who should be out of pocket whilst a dispute as to the lessee's asserted breach is determined'.[81] I agree. That statement of purpose (which clearly provides for the 'security purpose') is, at best, neutral in relation to the issue of risk allocation.
[81] Universal Publishers [60] (White J). White J also relied upon the provisions of the lease (in cl 19.4) as to the circumstances as to when the security can be called upon.
Conversely, the words 'payable on first demand of Contractor' (which apply only to the Bank Guarantees and not the Parent Company Guarantees) do support a risk allocation (or 'pay now, argue later') purpose. It was the ordinary meaning of the words 'pay on demand' that Gibbs J in Wood Hall stated were inconsistent with a requirement that the Bank 'should be bound to enquire into the rights of the Authority and the contractor under a contract to which the Bank was not a party'.[82]
[82] Wood Hall 451 (Gibbs J). It is this passage referred to by Gageler, Nettle & Gordon JJ in Simic v New South Wales Land and Housing Corporation [85].
Closer to home, in CPB Contractors [No 2], the words 'on demand' in a relevantly identical subcontract were critical to the court's conclusion that the entitlement to call upon the Bank Guarantees were not subject to any defence or set-off that might be raised by the Subcontractor. In that regard the court said:[83]
103An agreement to pay 'on demand' an amount that has been established by arbitral or curial determination, or by agreement between the parties, is, prima facie, an unusual use of the phrase 'on demand'.
104In our view, the words 'on demand' do not qualify or describe the 'amounts that are payable' in GC 35.3(a). Rather, the words 'on demand' in GC 35.3(a) are to be read with the words 'in order to recover'. They identify the object or purpose of GC 35.3(a). The purpose of having recourse to the bank guarantee is to recover 'on demand' amounts that are 'payable'. The 'demand' is made to the bank, without notice to the subcontractor (GC 35.1(a)(iii)). The evident purpose is to enable the contractor to recover amounts 'payable' by the subcontractor, by merely making demand (emphasised by the words 'first demand') on the bank, without notice to the subcontractor. The provision appears, prima facie, designed not merely to protect against the risk of insolvency of the subcontractor, but to provide immediate recovery by the contractor without any delay, including, it may be inferred, delays associated with the resolution of disputes.
[83] CPB Contractors [No 2] [103] - [104] (Buss P, Murphy & Beech JJA).
As can be seen, in its reasons, the court there referred to the opening words of Article 35 ('first demand'), Article 35.1(a)(iii) ('on demand') and Article 35.3(a) ('on demand') of the Subcontract in that case.
Article 35.3(a) is in identical terms to the Subcontract in the present case. It is concerned exclusively with the Bank Guarantees. There is no comparable provision in the Subcontract in relation to the Parent Company Guarantees.
I recognise that CPB Contractors [No 2] was decided in the context of a dispute as to rights of JKC under the Subcontract, rather than the rights under either the Bank Guarantee or the Parent Company Guarantees themselves. Nevertheless, the provisions relied upon by the court in that case, in relation to payment 'on demand' under the Bank Guarantee, in my view stand in stark contrast to the provisions in the Subcontract concerning the Parent Company Guarantees.
Nowhere in the Subcontract is there comparable language suggesting that amounts are payable under the Parent Company Guarantees 'on demand', in the sense determined by the court in CPB Contractors [No 2].
In this regard, I reject JKC's submission that the Bank Guarantees and the Parent Company Guarantees are 'treated as equivalent' by Article 35.[84] The only respect in which the provisions of Article 35 apply uniformly to the Bank Guarantees and the Parent Company Guarantees is in relation to the manner of dealing with the proceeds under Article 35.4.[85]
[84] ts 96.
[85] See [34] above.

Article 35.4, however, simply relates to the manner of dealing with the proceeds of a call on either the Bank Guarantees or the Parent Company Guarantees and with dealing with any remaining balance. As the Court in CPB Contractors [No 2] found, Article 35.4 is a procedural provision,[86] which presupposes a preliminary step that there must be a 'call' on a guarantee before there can be recourse to its proceeds.[87] Article 35.4 is not concerned with the circumstances in which a 'call' might be made, or in determining the liability of the guarantor in response to the 'call'. To determine those issues it is necessary to look elsewhere.
[86] CPB Contractors [No 2] [128] (Buss P, Murphy & Beech JJA).
[87] CPB Contractors [No 2] [130] (Buss P, Murphy & Beech JJA).
The absence of any provision comparable to Article 35.3, in relation to the Parent Company Guarantees, is not the only difference of significance in the Subcontract. There is also the fact that the Bank Guarantees are for specific sums and specific durations (see Article 35.1(b) and (c)).
As the court observed in CPB Contractors [No 2]:[88]
In our view, these features of the stipulated duration of the Bank Guarantees militate strongly against the subcontractor's construction of GC 35.3(a). The subcontractor submits that its sole purpose is to provide security against the risk of the subcontractor's insolvency. That purpose would be defeated to the extent that the stipulated Bank Guarantee would expire before, on the subcontractor's construction, the contractor may become entitled to call upon it. By contrast, the stipulated duration of the Bank Guarantees is consistent with the purpose of GC 35.3 being for the contractor to be in the money, to the extent of the Bank Guarantees, pending resolution of any dispute.
[88] CPB Contractors [No 2] [112] (Buss P, Murphy & Beech JJA).
These features of the Bank Guarantees are to be contrasted with the Parent Company Guarantees, which apply to all obligations of the Subcontractor and remain in effect until all obligations of the Subcontractor have been performed (including obligations that survive termination).[89]
[89] I have addressed the effect of termination in more detail below in the context of the construction of cl 3 of the Parent Company Guarantees.
In approaching the task of giving the Subcontract a 'businesslike' interpretation, in my view, it is one thing to discern a purpose that the contractor 'be in the money, to the extent of the Bank Guarantees, pending resolution of any dispute' (as per [112] CPB Contractors [No 2]). It is quite another thing to discern a purpose in the Subcontract that the parent companies should ensure that the contractor 'be in the money, to the full extent of a dispute with Subcontractor, pending resolution of that dispute'. In my view no such purpose can be determined from the Subcontract itself.
In this respect, picking up the matters of context referred to in [122] to [125] above, it is easy to readily discern the 'security' purpose in the Parent Company Guarantees. A reasonable business person would understand that, being parent entities, the guarantors 'stand behind' their subsidiaries, such that if the subsidiaries are unable, or unwilling, to perform their obligations, the guarantors can be expected to step in. The guarantors, as parent companies, are therefore the very kind of entity a reasonable business person would expect to be providing 'security' for their subsidiaries' performance.
At the same time, however, a parent company that guarantees the performance of all of its subsidiary's obligations under a contract will necessarily have a real interest in the rights under the underlying contract to which the subsidiary is a party. Unlike a bank, providing a bond or a letter of credit, the parent that guarantees performance will have a commercial interest to enquire as to the rights of the parties to the underlying contract.[90] Indeed, in the present case, as I noted at the outset, one of the defendants who provided the Parent Company Guarantees, General Electric Company, is itself a party to the Subcontract (as one of the companies in the consortium comprising the Subcontractor).
[90] A bank, under a performance bond, has no such commercial interest and, as Gibbs J put the position in Wood Hall at [451] it should not be 'bound to enquire into the rights … under the contract.'
In this way, the principle of autonomy, which serves the purpose of risk allocation in relation to a true performance bond,[91] does not find expression in the Subcontract in relation the Parent Company Guarantees.
[91] Simic v New South Wales Land and Housing Corporation (21016) 260 CLR 85 [6] - [8] (French CJ), [85] (Gageler, Nettle & Gordon JJ).
Nor does that principle appear in the Parent Company Guarantees themselves, to whose text I now turn.
First, in the Parent Company Guarantees, there is no provision akin to cl 3 of the Bank Guarantees, namely that:[92]
The [Bank/Insurance Company/Provider]'s obligation to make payment under this document shall arise on receipt of a demand, made in accordance with the provisions of this document without proof of any breach of any other conditions and notwithstanding any contest or dispute by the Subcontractor. The [Bank/Insurance Company/Provider] shall not be required or permitted to make any other investigation or enquiry or notify the Subcontractor prior to the satisfaction of the demand.
[92] See [41] above.
This clause manifests, and expresses, the principle of autonomy in relation to the Bank Guarantees. It reveals the 'cash equivalent' and 'pay on demand' nature of the guarantee.
There is nothing comparable in the Parent Company Guarantees suggesting that the guarantors shall pay on receipt of a demand 'notwithstanding any contest or dispute by the Subcontractor' or that they are not 'required or permitted to make any other investigation or enquiry or notify the Subcontractor prior to the satisfaction of the demand'. Even cl 3 of the Parent Company Guarantees, which I will come to shortly, does not contain such words.
Quite the contrary; the Parent Company Guarantees manifest an intention and a purpose that the guarantors have a real and substantial interest in the actual liability of the Subcontractor. That actual liability is what determines the extent of the guarantors' liability.
That is the natural and ordinary meaning to be given to cl 9.2 of the Parent Company Guarantees: that the guarantor is entitled to rely upon any defence or set-off that the Subcontractor could assert. By contrast with the Bank Guarantee, the guarantor is (to use the language of the Bank Guarantee) 'permitted to make any … investigation or enquiry or notify the Subcontractor prior to the satisfaction of the demand'.
I am unable to accept JKC's contention that cl 9.2 of the Parent Company Guarantees has no application to cl 3 and that cl 3 creates a distinct obligation separate from cl 2.
First, cl 9.2 refers to any claim under 'this Guarantee'. As a matter of grammar, it does not make sense for the words 'this Guarantee' to be read as referring to 'the Guarantee provided by cl 2'. The self‑referential word 'this' must be read as a reference to the whole of the Parent Company Guarantee itself (i.e. the document in which cl 9.2 is found).[93] In that regard, of course, the entire document is called a 'Parent Company Guarantee'. While the document does contain an additional feature (being the Indemnity, so described, in cl 6.5), the document as a whole best, and most obviously, meets the description 'this Guarantee'.
[93] Strictly grammatically, it might also refer to the particular clause in which the words appears, although this would make no sense, given that cl 9 does not, itself, provide for a guarantee.
I recognise in this regard, as JKC submits, that the document also uses the expression 'this deed' in a number of places,[94] and its submission that 'this deed' is to be contrasted with 'this Guarantee'. While I accept that, in this respect, the Parent Company Guarantee is not happily drafted, in my view the terms are, in context, to be regarded as equivalent.
[94] See the Parent Company Guarantees, cl 1, cl 3 (2^nd paragraph), cl 5, cl 8.1, cl 9.1.
Indeed, cl 9.1 of the Parent Company Guarantees, uses both expressions in the same clause in a manner that supports their equivalence:
Save for any direct costs, losses and/or expenses, properly incurred by the Contractor in connection with any successful enforcement of the rights and obligations under this Guarantee, which shall in all circumstances be payable to the Contractor by the Guarantor, the aggregate liability of the Guarantor under this deed shall not exceed the aggregate liability of the Subcontractor under the Subcontract, whether in contract (including warranty or indemnity), tort (including negligence or strict liability), statute, equity or any other extra-contractual theory. (emphasis added)
It is not possible, in my view, to draw any contractual significance from this difference in terminology. Indeed the use of the phrase 'this Guarantee' in cl 9.1 rather supports its being a reference to the document as a whole. Otherwise, on JKC's construction, the costs and expenses of successful enforcement of cl 3 or cl 6.5 would not be included in the proviso in cl 9.1.
In my view, a reasonable businessperson, when faced with a document described as a Parent Company Guarantee, reading the document as a whole, would not, when arriving at the unqualified words in cl 9.2 (i.e. 'notwithstanding anything to the contrary above') understand the words 'this Guarantee' to have some narrow meaning (by reference to, inter alia, the distinction with the word 'deed').
A reasonable businessperson would give cl 9.2 its natural and ordinary meaning and understand the sub-clause to be referring to the document as a whole and all of the words preceding it.
Consistent with this interpretation is the conclusion that cl 3 is a 'mechanistic provision' for the operation of cl 2 and does not create obligations separate from, and independently of, cl 2.
In that regard, there is no significance to be attached to the fact that cl 2 includes the words 'subject to Clause 9' and cl 3 does not. That is because it is cl 2 which, relevantly, imposes the obligations. Clause 3 provides the mechanism for the enforcement of those obligations (and on the defendants' case, only some of them).
The contrary construction, i.e. treating cl 3 as a substantive, independent obligation, in my view would produce a surprising (and in a number of respects uncommercial) result. It would mean that, pursuant to cl 3 of the Parent Company Guarantees, JKC has superior rights to those given to it by cl 2: namely, rights that are payable on demand and without reference to an actual underlying liability of the Subcontractor. What is more, those superior rights are not to be understood as a guarantee (as JKC submitted, cl 3 is not a guarantee)[95] or, in the case of cl 6.5, an indemnity. It is, on JKC's construction something else ('it is or is analogous to a performance bond').
[95] JKC's submissions as to Operation of Parent Company Guarantees dated 29 January 2019 [45].
This would be a surprising way to understand the Parent Company Guarantees as a whole. JKC's construction would have it that a document which (in the Subcontract) is called a 'guarantee', which is titled a 'guarantee' and which expressly provides a 'guarantee', nevertheless should be understood by the reasonable businessperson to create an unnamed right that is in some respects superior to the guarantee itself. On this view cl 3 would, in effect, be the primary provision and cl 2 only a secondary 'accounting' provision.
On the contrary, in my view, it is cl 2 that is the primary provision.
In this respect, cl 2 and cl 3 of the Parent Company Guarantees must be read together. Not, however, in the elaborate way in which JKC submits, where cl 3 operates first, followed by an 'accounting' or 'reckoning' at some later time wrought by cl 2 and cl 6.3.[96] Rather, they are to be read together, such that cl 3 provides a mode of enforcement of the obligations created by cl 2. Those obligations, in all cases, are subject to any defence, set-off or counterclaim available to the Subcontractor, including where the mechanism of cl 3 is employed.
[96] See [53] - [55] above.
In this regard, JKC's construction (that liability under cl 3 precedes the 'ultimate' liability under cl 2) rather assumes that there will always be a claim and a dispute between JKC and the Subcontractor in relation to which the ultimate 'accounting' or 'reckoning' will occur. The Parent Company Guarantees, however, contain no such assumption. Indeed, as they expressly recognise, JKC is not required to enforce its rights against the Subcontractor before calling upon the Parent Company Guarantee.
The assumed 'reckoning' would not occur in such a case. For example, if in the present case there were no arbitral proceedings between JKC and the Subcontractor, and JKC simply issued a written notice under cl 3 to discharge a liability of the Subcontractor, how would the reckoning occur? On JKC's construction, it could sue on the cl 3 notice, and assuming the existence of a 'reasonable opinion', the guarantor would have no right to raise any defence, set-off or counterclaim available to the Subcontractor.[97] Then, on JKC's construction, with judgment against it on the cl 3 obligation, the guarantor would (apparently) be obliged to commence proceedings of its own, to establish the extent of its ultimate liability under cl 2, so that the necessary 'reckoning' may occur. By this route, the 'defence, set-off or counterclaim' available to it (under cl 9.2) is effectively converted into a deferred claim for restitution of the 'overpaid' amount.
[97] Accepting, in JKC's favour for the purposes of the example, that cl 3 applies to obligations to pay money.
That is not, in my view, a businesslike interpretation of the Parent Company Guarantees. Rather, what the Parent Company Guarantees contemplate in such a case is that, being sued on the cl 3 notice, the guarantor would be entitled to raise the 'defence, set-off or counterclaim' as a shield.
The position is no different, as a matter of principle, in a case, such as the present, where there is a claim and dispute between JKC and the Subcontractor. Being sued on the cl 3 notice, the guarantor would be entitled to raise the 'defence, set-off or counterclaim'. No doubt, in such a case, depending upon the circumstances, as a practical matter, the multiplicity of proceedings may need to be addressed. This might, for example, involve questions as to whether there should be a stay of one proceeding pending the resolution of the other.
Furthermore, this construction is not, as JKC contends, inconsistent with cl 6.1 of the Parent Company Guarantees, which provides that the obligations of the guarantor are 'principal obligations'. The guarantors' obligations are 'principal obligations' in the sense that JKC is not required to enforce them against the Subcontractor; JKC may seek to enforce the terms of the Parent Company Guarantees as principal obligor. The content of that principal obligation, however, is determined by the extent of liability of the Subcontractor and so, in that sense, is secondary to that of the Subcontractor. As was the case in Vossloh, the reference to 'principal obligations' does not 'convert into purely primary obligations, obligations which are otherwise secondary in nature'. [98]
[98] Vossloh [45] (Sir William Blackburne).
Finally, in this regard, I should deal with JKC's reliance on the 'reasonable opinion' trigger in cl 3 and its submission that the requirement for the formation, by JKC, of a reasonable opinion 'must have work to do'. JKC submits that if that requirement was merely a precondition, and failure by the Subcontractor had to be established or admitted (that is, actually exist), the requirement would be otiose. [99]
[99] JKC's Submissions as to Operation of Parent Company Guarantees dated 29 January 2019 [77].
In that regard, I accept the defendants' submission that the requirement for the formation of a 'reasonable opinion' does have work to do on their construction. In that regard, the requirement for a 'reasonable opinion' means that JKC must at least look to the Subcontractor to fulfil its obligations before it calls upon the guarantor to perform, even though it is not required to enforce those rights against the Subcontractor. Otherwise, JKC could, in its uncontrolled discretion, treat the guarantors as the Subcontractor.[100]
[100] ts 123 - 124.
In that respect, I accept the defendants' submission that at least one purpose of the requirement for a 'reasonable opinion' is to provide protection for the guarantors, by ensuring that JKC must have a reasonable basis before it can call upon the guarantors to take over obligations in the Subcontract.
The identification of such a purpose in the requirement for a 'reasonable opinion' makes even more sense if, on the defendants' construction, cl 3 is confined to those circumstances in which the guarantor is called upon to take over the actual performance of the Subcontract, (i.e. carrying out the Works as opposed to paying money). I have discussed that aspect of the construction below, in the context of the second and third Proposed Declarations.
Nevertheless, even if cl 3, properly construed, applies to obligations to pay money, the requirement for a 'reasonable opinion' has work to do as part of the mechanism for enforcing the obligations created by cl 2, the primary provision.
For these reasons, in my view, the Parent Company Guarantee, on its proper construction, does not create a 'pay now, argue later' obligation in cl 3 or elsewhere.
Notwithstanding the particular wording of the first of the Proposed Declarations, as I have explained above at [19] to [21], that declaration was intended to reflect the 'pay now, argue later' (or performance bond) aspect of JKC's construction. Having rejected that construction, I would decline to make the first of the Proposed Declarations on the merits.
It is, accordingly, not necessary to consider issues of utility and discretion in relation to declaratory relief in relation to the first Proposed Declaration.

The remaining proposed declarations

Having declined to make the first Proposed Declaration, the claim for the remaining Proposed Declarations, strictly, should fall away.
That is because, the defendants having successfully resisted the notion that the Parent Company Guarantees create a 'pay now, argue later' obligation, declarations in terms of the other Proposed Declarations would, strictly speaking, be hypothetical.
JKC accepted this to be the case, although it submitted that I should nevertheless determine the matters the subject of the other Proposed Declarations on the basis that, as it (somewhat generously) submitted, this matter 'may well' go elsewhere.[101]
[101] ts 43.
As I have explained below, in relation to the fourth Proposed Declaration, concerning the proper test as to what constitutes a 'reasonable opinion', declaratory relief would not be appropriate in any event. That Proposed Declaration would, in my view, involve the Court being asked to give a purely advisory opinion in the absence of a proper factual context and would thus be inappropriate in the circumstances.
The second and third Proposed Declarations, which involve matters of pure construction of the Parent Company Guarantees, are different in nature. Those declarations concern the defendants subsidiary arguments as to why they have no liability under the Notices of Demand, namely that:
(a)cl 3 is concerned only with the guarantor's obligation to 'perform' the obligations in the Subcontract (i.e. to carry out the Works), in place of the Subcontractor, and not with payment obligations;[102] and
(b)the obligations covered by cl 3 do not operate after termination of the Subcontract.[103]
[102] Defendants' submissions dated 19 February 2019 [30] - [36].
[103] Defendants' submissions dated 19 February 2019 [41] - [42].

While declarations in terms of the second and third Proposed Declarations might be refused on discretionary grounds, on the basis that they would be advisory opinions, in my view, having heard argument, it is appropriate that I express my view as to the matters of construction raised by them. In particular, as will be apparent, the resolution of those issues serves to reinforce the construction I have reached in relation to the primary issue.
Accordingly, I turn to state my conclusions in relation to those issues.

Does cl 3 of the Parent Company Guarantee apply to payment obligations post-termination?

At first glance, the notion that cl 3 of the Parent Company Guarantees is concerned only with performance obligations in the Subcontract (i.e. to carry out the Works), rather than with payment obligations, seems quite improbable.
As JKC points out, the phrases in cl 3 referring to 'any of the Subcontractor's obligations' and 'discharge any of the Subcontractor's liabilities' are expressed in very broad terms.[104] On their face, those phrases, particularly the notion of 'discharging liabilities', appear apt to refer to obligations to pay money. In that regard, there do not appear to be clear linguistic markers to evince an intention to exclude monetary liabilities. [105]
[104] JKC's submissions in Reply dated 1 March 2019 [38].
[105] JKC's submissions in Reply dated 1 March 2019 [40].
The textual or linguistic matters that the defendants rely upon in this regard are:
(a)the heading of cl 3: 'Guarantor to perform'; and
(b)the juxtaposition in the language used to refer to performance obligations in cl 2(a) and payment obligations in cl 2(b) and the fact that only the former language is used in cl 3;[106] and
(c)that the word 'discharge', in the context of the juxtaposition between the words in cl 2(a) and cl 2(b), is to be contrasted with the word 'paid' and does not refer to monetary liabilities.[107]
[106] Defendants' submissions dated 19 February 2019 [32]. See [73] - [75] above.
[107] Defendants' submissions dated 19 February 2019 [35] - [36].
While these textual markers do provide some support for the defendants' construction, on their own they do not provide a clear basis for the 'constructional choice' between JKC and the defendants' contentions.
Notwithstanding these limited textual markers, I have concluded that the defendant's construction in this respect is to be preferred.
In this regard, the most important interpretive key, in my view, comes from the closing words of the first paragraph of cl 3: 'and continue to perform those obligations and discharge those liabilities (as the case may be) until the termination of the Subcontract by the effluxion of time or otherwise'.
The natural and ordinary meaning of those words, and in my view the only sensible way of interpreting those words, is that the words 'or otherwise' refer back to the words 'termination of the Subcontract'. That is, the continuing obligation of performance and discharge referred to in cl 3 is expressed to come to an end upon termination of the Subcontract for any reason.
JKC's contention that words 'or otherwise' attach to the word 'until' (such that it reads 'continue to perform … until otherwise') is, in my view, ungrammatical and simply makes no sense. It would be, in my view, a strained construction of those words, and only permissible if there were no other construction which gave a congruent operation to the various components of the whole of the Parent Company Guarantees.[108]
[108] Wilkie [16] (Gleeson CJ, McHugh, Gummow & Kirby JJ).
If, however, as the defendants contend, cl 3 is only concerned with the obligation to actually perform (or cause to be performed) the Subcontract itself, the natural and ordinary meaning of the closing words of the first paragraph of cl 3 make perfect commercial sense.
If cl 3 is only engaged in circumstances where the guarantor is required to 'take over' performance of the Subcontract (i.e. the Works) it makes sense that it would only operate while the Subcontract was still operative; that is, while there were still performance obligations to be carried out.
For these reasons, in my view, the defendants two subsidiary contentions in relation to cl 3 (only performance obligations and only until termination) reinforce one another and give a congruent and harmonious construction to the clause as a whole.
Of course, it is correct (as JKC identified) that there are many obligations of the Subcontractor in the Subcontract that survive termination. And, there can be no question that all of those obligations are guarantees by the defendants under the Parent Company Guarantees. That is the unquestionable effect of cl 2 of the Parent Company Guarantees, the primary provision. The fact that the mechanical provisions of cl 3 might not apply post-termination does not relieve the defendants of the guarantee obligations under cl 2.
Indeed, almost all of the obligations in the Subcontract identified by JKC as surviving termination are obligations to pay money.[109] Those obligations are clearly enforceable under cl 2, with or without the mechanism provided by cl 3. Indeed, on the defendants' construction there is no 'reasonable opinion' precondition or gateway to such enforcement.
[109] See Articles 11.5(b), 24.1(d), 24.3(f), 25.2(d), 33.1(a)(ii)(B), 33.1(b), 33.2(d)(i), 33.2(d)(iii) and (iv), 33.3(c), 36(a), 39.3(b), 39.4, 39.5(b), 39.8(a)(iii), 39.9(a), 39.9(b), 39.9(d), 40.1. 41.2, 44.6(c), 47.2(a), 47.2(c)(i), 47.2(c)(ii), 50.5(b), 50.5(c) and 56.2(a).
Similarly, to the limited extent that there may be performance obligations post-termination, those obligations are discrete and finite obligations, such as making good defects or deficiencies in the Work,[110] or performing clean-up operations.[111] Those obligations are also enforceable under cl 2, with or without the mechanism provided by cl 3.
[110] See Article 20.3.
[111] See Article 30.5(d).
In this regard, there is no sense in which a construction that confines the operation of cl 3 to performance obligations during the currency of the Subcontractor denudes operation of the Parent Company Guarantees as a whole. All obligations, including post-termination obligations, are guaranteed by cl 2.
It is simply a construction that has the result that cl 3 applies where, during the currency of the Subcontract, JKC seeks to have the guarantor 'step in' and take over performance of the Subcontract and continue to perform it until completion. In those circumstances, and only in those circumstances, the Parent Company Guarantees requires JKC to form the 'reasonable opinion' that the Subcontractor is failing to perform its obligations or discharge its liabilities. It is in those circumstances, and only those circumstances, that the additional pre-condition of the formation of a 'reasonable opinion' must occur.
This, in my view, is a construction of cl 3 which gives a congruent and commercial operation to all of its component parts and indeed to all of the components of the Parent Company Guarantees as a whole. In particular, it is a construction that is consistent with my conclusions in relation to the primary issue that cl 3 does not create an independent 'pay now, argue later' obligation.
For these reasons, I would refuse to make the second and third Proposed Declarations on the merits. In any event, in light of my conclusion in relation to the first Proposed Declaration, in my view, there would be no utility in making the second and third Proposed Declarations. A real issue would arise as to whether they should be refused on discretionary grounds.
I turn finally to the fourth Proposed Declaration, concerning the test for what is a 'reasonable opinion'.

Reasonable opinion

The fourth Proposed Declaration is a declaration to the effect that the 'test as to the formation by JKC of a reasonable opinion for the purposes of cl 3 of the PCGs, is whether, at the time the opinion is formed, there exist facts that are sufficient to induce such a state of mind in a reasonable person'.
JKC does not seek a determination as to whether it had a 'reasonable opinion'. Nor indeed are there any agreed facts, beyond the fact of the Cross Claims and the Notices of Demand, as to the facts or evidence upon which JKC alleges that it formed a 'reasonable opinion'. At the very least, given that the Costs Claims proceed upon the basis that JKC, and not the Subcontractor, validly terminated the Subcontract, those matters would include many of the matters in dispute in the arbitration between JKC and the Subcontractor.[112]
[112] See Exhibit 16, Statement of Defence and Counterclaim [29.1] - [29.137]; Claimants' Reply to Statement of Defence and Counterclaim [25.1] - [25.111].
In the event that there were evidence and facts upon which to determine whether there was a 'reasonable opinion', a myriad of legal and factual issue might arise for consideration. A few examples suffice:
•Is JKC required to take into account potential defences or set‑offs that might be asserted by the Subcontractor?
•Is JKC required to make an assessment as to the relative legal merits of those defences or set-offs?
•Is JKC to have regard to facts of which it has actual knowledge only, or are other forms of constructive knowledge relevant? If so, what is the relevant level of knowledge?
None of these issues can be properly addressed in the abstract, or in the absence of concrete facts. Any attempt to declare the content of the test for a 'reasonable opinion' in those circumstances runs the risk of being a banal generality (e.g. a 'reasonable opinion' is an 'opinion that is reasonable'), at one end of the spectrum, or a litany of hypothetical factual scenarios, at the other.
The fourth Proposed Declaration, in my view, tends in the direction of former end of the spectrum. In that regard, not only does it conceal or elide the issues that would arise in a concrete factual scenario, it would be of no utility. Even if it were legally correct (as to which I express no view), such a declaration would not resolve, or substantially assist in the resolution of, any dispute between JKC and the defendants. Any action to enforce the guarantee would necessarily involve the dispute as to whether JKC formed a 'reasonable opinion', a dispute that would require determination of that legal issue, in the context of a real factual context.
In this regard, the following observations of the High Court in Bass v Permanent Trustee Company Ltd apply with equal force to the fourth Proposed Declaration:[113]
As the answers given by the Full Court and the declaration it made were not based on facts, found or agreed, they were purely hypothetical. At best, the answers do no more than declare that the law dictates a particular result when certain facts in the material or pleadings are established. What those facts are is not stated, nor can they be identified with any precision. They may be all or some only of the facts. What facts are determinative of the legal issue involved in the question asked is left open. Such a result cannot assist the efficient administration of justice. It does not finally resolve the dispute or quell the controversy. Nor does it constitute a step that will in the course of the proceedings necessarily dictate the result of those proceedings. Since the relevant facts are not identified and the existence of some of them is apparently in dispute, the answers given by the Full Court may be of no use at all to the parties and may even mislead them as to their rights. Courts have traditionally declined to state - let alone answer - preliminary questions when the answers will neither determine the rights of the parties nor necessarily lead to the final determination of their rights. The efficient administration of the business of courts is incompatible with answering hypothetical questions which frequently require considerable time and cause considerable expense to the parties, expense which may eventually be seen to be unnecessarily incurred.
[113] Bass v Permanent Trustee Company Ltd [1999] HCA 9; (1999) 198 CLR 334 [49] (Gleeson CJ, Gaudron, McHugh, Gummow, Hayne & Callinan JJ).
For these reasons, in my view, it would be inappropriate to attempt to formulate an appropriate test for what constitutes a 'reasonable opinion' in the absence of facts, found or agreed.
I would, therefore, refuse to make the fourth Proposed Declaration.

Conclusion

For the above reasons, JKC's application must be dismissed.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
JS
Research Associate to the Honourable Chief Justice Quinlan
24 MAY 2019