JKC Australia LNG Pty Ltd v CH2M Hill Companies Ltd [No 2] - [2020] WASCA 112

JURISDICTION     :   SUPREME COURT OF WESTERN AUSTRALIA
TITLE OF COURT :   THE COURT OF APPEAL (WA)
CITATION:   JKC AUSTRALIA LNG PTY LTD -v- CH2M HILL COMPANIES LTD [No 2] [2020] WASCA 112
CORAM:   BUSS P
BEECH JA
VAUGHAN JA

HEARD:   27 & 30 MARCH 2020
DELIVERED          :   22 JULY 2020
FILE NO/S:   CACV 70 of 2019
BETWEEN:   JKC AUSTRALIA LNG PTY LTD
Appellant
AND
CH2M HILL COMPANIES LTD
First Respondent
UGL PTY LIMITED (FORMERLY KNOWN AS UGL LIMITED)
Second Respondent
GENERAL ELECTRIC COMPANY
Third Respondent

ON APPEAL FROM:
Jurisdiction              :   SUPREME COURT OF WESTERN AUSTRALIA
Coram:   QUINLAN CJ
File Number            :   CIV 2584 of 2018

Catchwords:

Contract - Construction - Parent company guarantees provided by respondents in respect of performance of subcontractor's obligations under subcontract with appellant - Whether primary judge erred in holding that parent company guarantees did not require respondents to meet 'pay now, argue later' liability on the formation of a reasonable opinion that subcontractor failed to discharge liability under subcontract - Whether cl 3 of parent company guarantees provided provisional remedy or evinced purpose of risk allocation not subject to any defence, set‑off or counterclaim by respondents - Whether cl 3 of parent company guarantees covered payment obligations - Whether obligations of respondents under cl 3 of parent company guarantees ceased upon termination of subcontract - Turns on own facts

Legislation:

Nil

Result:

Appeal dismissed

Category: B

Representation:

Counsel:

Appellant	:	S K Dharmananda SC, J Garas SC & R Collins
First Respondent	:	J Gleeson QC & P Thiagarajan
Second Respondent	:	J Gleeson QC & P Thiagarajan
Third Respondent	:	J Gleeson QC & P Thiagarajan

Solicitors:

Appellant	:	Clyde & Co (Perth Office)
First Respondent	:	Corrs Chambers Westgarth
Second Respondent	:	Corrs Chambers Westgarth
Third Respondent	:	Corrs Chambers Westgarth

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

Andar Transport Pty Ltd v Brambles Ltd [2004] HCA 28; (2004) 217 CLR 424
Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99
Bachmann Pty Ltd v BHP Power New Zealand Ltd [1998] VSCA 40; [1999] 1 VR 420
Black Box Control Pty Ltd v TerraVision Pty Ltd [2016] WASCA 219
Bofinger v Kingsway Group Ltd [2009] HCA 44; (2009) 239 CLR 269
Bowesco Pty Ltd v Westpoint Management Ltd [2015] WASCA 184; (2015) 109 ACSR 1
Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd [2008] FCAFC 136; (2008) 249 ALR 458
CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [No 2] [2017] WASCA 123
Dedert Corporation v United Dalby Bio-Refinery Pty Ltd [2017] VSCA 368
Dicom AWT Operations Pty Ltd v City of Stirling [2019] WASCA 117
Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd [2017] HCA 12; (2017) 261 CLR 544
EDWF Holdings 1 Pty Ltd v EDWF Holdings 2 Pty Ltd [2010] WASCA 78; (2010) 41 WAR 23
Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640
Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812
Foran v Wight [1989] HCA 51; (1989) 168 CLR 385
JKC Australia LNG Pty Ltd v CH2M Hill Companies Ltd [2019] WASC 177
Kawasaki Heavy Industries Ltd v Laing O'Rourke Australia Construction Pty Ltd [2017] NSWCA 291; (2017) 96 NSWLR 329
Life Insurance Co of Australia Ltd v Phillips [1925] HCA 18; (1925) 36 CLR 60
Marubeni Hong Kong and South China Ltd v Mongolian Government [2005] EWCA Civ 395; [2005] 1 WLR 2497
McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579
McVeigh v National Australia Bank Ltd [2000] FCA 187; (2000) 278 ALR 429
Menz v Wagga Wagga Show Society Inc [2020] NSWCA 65
Mineralogy Pty Ltd v The State of Western Australia [2005] WASCA 69
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 256 CLR 104
Norton Property Group Pty Ltd v Ozzy States Pty Ltd (in liq) [2020] NSWCA 23
Olympic Holdings Pty Ltd v Windslow Corporation Pty Ltd (in liq) [2008] WASCA 80; (2008) 36 WAR 342
Re Sigma Finance Corp (in administrative receivership) [2009] UKSC 2; [2010] 1 All ER 571
Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65; (2007) 69 NSWLR 603
Simic v New South Wales Land and Housing Corporation [2016] HCA 47; (2006) 260 CLR 85
Sino Iron Pty Ltd v Mineralogy Pty Ltd [2019] WASCA 80
Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [2015] VSCA 98
Sunbird Plaza Pty Ltd v Maloney [1988] HCA 11; (1988) 166 CLR 245
Tokio Marine & Nichido Fire Insurance Co Ltd v Hans Bo Kristian Holgersson trading as Holgerssons Complete Home Service [2019] WASCA 114
Vossloh Aktiengesellschaft v Alpha Trains (UK) Ltd [2010] EWHC 2443; [2011] 2 All ER (Comm) 307
Wilkie v Gordian Runoff Ltd [2005] HCA 17; (2005) 221 CLR 522
Wood Hall Ltd v Pipeline Authority [1979] HCA 21; (1979) 141 CLR 443
Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bank of Greece SA [2012] EWCA Civ 1629

BUSS P & VAUGHAN JA:

Overview

The appellant, JKC Australia LNG Pty Ltd (JKC), appeals against orders dismissing its application for declarations as to the proper construction of three instruments described as 'Parent Company Guarantees' which were executed by the respondents. By its appeal, JKC seeks, in substance, to establish its preferred construction of the Parent Company Guarantees that was rejected by the primary judge.[1]
[1] See JKC Australia LNG Pty Ltd v CH2M Hill Companies Ltd [2019] WASC 177 (primary reasons).
The Parent Company Guarantees were provided by the respondents to guarantee the due performance of obligations of the Subcontractor under a subcontract dated 27 April 2012 (Subcontract) between JKC, as contractor, and an unincorporated joint venture, as the Subcontractor.[2] The respondents, with one exception,[3] are parent companies to members of the consortium comprising the Subcontractor. By the Subcontract, the Subcontractor contracted to carry out works relating to the construction of a combined cycle power plant for the Ichthys Project - a large LNG development in the Northern Territory.
[2] The unincorporated joint venture comprised CH2M Hill Australia Pty Ltd, UGL Infrastructure Pty Ltd, General Electric Company and General Electric International Inc (referred to collectively as the 'Subcontractor').
[3] The third respondent, General Electric Company, was one of the members of the consortium comprising the Subcontractor and also provided a Parent Company Guarantee.
The central issue on the appeal is whether, on their proper construction, the Parent Company Guarantees are 'pay now, argue later' instruments such that the respondents' liability to respond to a claim under them is not subject to any defence, set-off or counterclaim. JKC asserts, in particular, that following the appropriate notice cl 3 of the Parent Company Guarantees requires the respondents to put JKC in the money in the amount claimed even though the Subcontractor's liability is disputed.
Three issues arise on JKC's appeal. Is it the case that on the proper construction of cl 3 of the Parent Company Guarantees:
1.An independent right and obligation is created which requires each respondent to immediately perform an obligation or discharge a liability on JKC issuing a notice based on its reasonable opinion that the Subcontractor has failed to perform the obligation or discharge the liability?
2.The clause may be invoked in respect of obligations or liabilities to pay money?
3.The right to invoke the clause does not cease on the termination of the Subcontract?
JKC says that the answer to each question is 'yes'. Critically, JKC contended that, in the events which have happened, cl 3 of the Parent Company Guarantees operated to oblige the respondents to discharge alleged liabilities of the Subcontractor said to arise under art 50.5(c) of the Subcontract even though those liabilities were a matter of dispute in an ongoing international arbitration. The respondents say that the answer to each question is 'no'. In relation to the first question the respondents also say that, whatever the answer, there should be no declaration as it would lack utility and should be refused on discretionary grounds.
For the reasons that follow the appeal should be dismissed. JKC's preferred construction assumed that cl 3 of the Parent Company Guarantees had a purpose that cannot be made out based on the text of the provision read and understood in its context. On the proper construction of cl 3 of the Parent Company Guarantees, JKC fails in respect of each of the three issues it has nominated.

Background facts

A broad outline of the facts leading to the litigation

The trial before the primary judge proceeded on a statement of agreed facts[4] and documents. No factual error was asserted on appeal. Accordingly, what follows is drawn from the primary reasons, the statement of agreed facts and the documents.
[4] Exhibit 1 GAB 170 - 176.
In broad terms the factual background is as follows:
1.JKC was the main contractor in relation to the Ichthys Project.
2.The Subcontractor agreed, by the Subcontract,[5] to provide the project management, engineering, procurement, construction, commissioning, start-up and confirmation of performance testing for a combined cycle power plant for the Ichthys onshore LNG facilities located at Bladin Point in the Northern Territory.
3.The Subcontract provided, by art 35, for the Subcontractor to provide two types of guarantees. First, bank guarantees (art 35.1). These were provided in the approved form set out in annexure 1A of the Subcontract.[6] Second, the Parent Company Guarantees (art 35.2). These were provided in the approved form set out in annexure 1B of the Subcontract.[7]
4.The Subcontract was terminated by no later than 2 February 2017.
5.The parties are in dispute as to which party validly terminated the Subcontract. That dispute is the subject of an international arbitration. In the arbitration the Subcontractor claims the value of works performed on a quantum meruit basis. JKC has counterclaimed. JKC claims reimbursement of its additional costs and expenses in completing the works relying on a contractual entitlement under the Subcontract (art 50.5(c)).
6.At the time of trial the works contemplated by the Subcontract had not been completed.
7.JKC has issued invoices to the Subcontractor in various amounts asserting a claim pursuant to art 50.5(c) of the Subcontract for reimbursement of additional costs and expenses in completing the works or damages.[8] The Subcontractor has not paid the amount claimed (although JKC has had recourse to bank guarantees as provided by the first and second respondents). In the arbitration the Subcontractor disputes JKC's entitlement to the costs and expenses as claimed.
8.On 24 July 2018 JKC gave notice to the respondents asserting that, in JKC's reasonable opinion, the Subcontractor had failed to discharge its liabilities under art 50.5(c) by failing to pay certain of the costs claims.[9] Relying on cl 3 of the Parent Company Guarantees, JKC required the respondents to discharge those liabilities. A further notice of demand was issued by JKC to the respondents on 2 November 2018 as to a further costs claim.[10]
9.The respondents have not paid any of the amounts demanded from them in either the 24 July 2018 notice or the 2 November 2018 notice.
10.In correspondence the respondents denied liability under the Parent Company Guarantees.[11] Among other things the respondents said that, on the proper construction of the Parent Company Guarantees, JKC's claims in the arbitration for reimbursement of its additional costs and expenses in completing the works must be resolved and quantified, in favour of JKC, before any liability on the part of the respondents crystallises.
[5] Exhibit 2 GAB 177 - 522.
[6] Exhibit 3 GAB 539 - 621.
[7] Exhibit 4 GAB 622 - 639.
[8] Exhibit 6 GAB 640 - 644 (costs claim no 1); exhibit 7 GAB 645 - 647 (costs claim no 2); exhibit 9 GAB 659 - 660 (costs claim no 3); exhibit 11 GAB 681 - 682 (costs claim no 4); GAB 690 - 692 (costs claim no 5); GAB 699 - 701 (costs claim no 6).
[9] Exhibit 10 GAB 661 - 680.
[10] Exhibit 14 GAB 693 - 698.
[11] Exhibit 12 GAB 683 - 689.
In support of its preferred construction, JKC made several references to the scope of the works under the Subcontract. JKC also sought support for its preferred construction from the alleged circumstance that the works under the Subcontract were integral to the Ichthys Project as a whole.[12] The statement of agreed facts provided no detail in either respect. It is, however, plain from the scope of works,[13] the initial subcontract price[14] and the estimated direct labour man-hours[15] that the works to construct the combined cycle power plant constituted an extremely large and complex undertaking. The scope of works also referred to a partial start-up of the plant being required significantly in advance of the main onshore facilities to provide permanent power for entire site-wide construction and commissioning activities.[16] In oral submissions senior counsel for JKC also sought to make something of the fact that the work time schedule provided that certain things needed to be done by particular times.[17]
[12] Appeal ts 18, 39 - 40.
[13] Exhibit 2 GAB 428 - 472.
[14] Exhibit 2 GAB 476, 488 - 493.
[15] Exhibit 2 GAB 495 - 496.
[16] Exhibit 2 GAB 462.
[17] Appeal ts 40. See GAB 526 (item 16).
Whether the Subcontractor has any liability to JKC under art 50.5(c) of the Subcontract is in issue between JKC and the Subcontractor in the arbitration. JKC's claim for costs and expenses is very large. The costs claims were summarised by the primary judge as consisting of the following:[18]
[18] Primary reasons [39] fn 16. See also fn 8 above.

Date of Claim	Amount AUD	Amount USD	Amount JPY	Amount EUR	Amount GBP
29/09/17	61,978,353.62	621,959,127.00	315,465.00	111,312.14
14/02/18	364,325,919.07	1,193,769,862.00	193,192.36	193,778.99
01/05/18	235,870,319.80	1,107,311.01	529,915,186.00	1,081,871.23	52,404.28
24/07/18	256,006,280.91	8,698,111.72	327,864,212.00	763,532.99	55,387.72
18/10/18	256,027,015.84	6,880,614.19	338,755,589.00	426.26	201,470.03
08/01/19	339,217,767.00	230,239,265.00	146,579.00	89,269.00
Total	1,513,425,656.24	16,686,036.92	3,242,503,241	2,501,066.84	703,622.16

JKC's notices of demand to the respondents of 24 July 2018 and 2 November 2018 concerned costs claims 1 - 3 and 4 respectively.

The terms of the Parent Company Guarantees

The Parent Company Guarantees are all in identical form - a form provided for by the Subcontract (art 35.2(a) and annexure 1B). The primary reasons set out the terms of the Parent Company Guarantees.[19] While repetitive, given the centrality of the terms of the Parent Company Guarantees to the questions on appeal, it is necessary to do so again in these reasons.
[19] Primary reasons [15].
In recital A the Parent Company Guarantees refer to the Subcontract and then state:
(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. (emphasis added)
Clause 1 provides that, unless the context otherwise requires, a word or phrase defined in the Subcontract has the same meaning as in the Subcontract. In other words, where a word or phrase is defined in the Subcontract, then, unless the context otherwise requires, it has the same meaning when used in the Parent Company Guarantees.
Clauses 2 and 3 are provisions of central importance to the questions on appeal:
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 Subcontract 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. (emphasis added)
Clause 4 is a representation and warranty clause. Clauses 5 and 6 then provide:
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 refundable:
(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. (emphasis added)

Clause 7 deals with notices pursuant to the Parent Company Guarantees. Clause 8 contains various boilerplate provisions (eg governing law and jurisdiction, severance, waiver and confirmation that the remedies provided for are cumulative). The only thing that ought to be noted as to cl 8 is that it refers to 'this deed' in cl 8.1 - cl 8.4.
Clause 9 provides:
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. (emphasis added)
In due course it will be necessary to compare the terms of the Parent Company Guarantees with the terms of the bank guarantees (see [40] - [42] below). For now, however, it is convenient to turn to the terms of the Subcontract.

The relevant terms of the Subcontract

The Subcontract is voluminous. However, its arrangement takes a relatively standard form. The Subcontract comprises a form of agreement and general terms together with numerous attached 'exhibits'. The latter contain such things as the scope of work, a compensation schedule, work time schedule and drawings and specifications. In these reasons, unless otherwise stated, reference to particular provisions are references to the articles in the general terms.
The Subcontract is governed by and is to be interpreted in accordance with the laws of Western Australia.[20]

Bank guarantees and Parent Company Guarantees

[20] Subcontract form of agreement cl 4 GAB 180.

Article 35 makes provision for bank guarantees and the Parent Company Guarantees. It commences in this way:
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: (emphasis added)
Accordingly, the Parent Company Guarantees (and arguably also the bank guarantees) are to guarantee the due performance of the Subcontractor's obligations. However, there is otherwise a significant textual difference between the reference to the bank guarantees and the Parent Company Guarantees. The bank guarantees, but not the Parent Company Guarantees, are to be 'payable on first demand'.
Article 35 then makes specific provision for the bank guarantees (art 35.1) and the Parent Company Guarantees (art 35.2). Among other things art 35.1(b) provides that the initial amount of the bank guarantees must be equal to 10% of the Subcontract price. Article 35.2(a), dealing with the form of the Parent Company Guarantees, 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.
Accordingly, there is only one form of permitted Parent Company Guarantee.
Article 35.2(b) provides for JKC's rights where the Subcontractor fails to provide a Parent Company Guarantee in accordance with art 35.2(a). As with the bank guarantees (art 35.1(d)), where there is a failure to provide a satisfactory Parent Company Guarantee, JKC is not obliged to make any payments to the Subcontractor and may suspend or terminate the Subcontract.
The term 'Subcontractor Guarantor' is defined. Relevantly, it means each of the ultimate parent companies of each member of the Subcontractor from time to time.[21] It was common ground that the respondents were each Subcontractor Guarantors. As to annexure 1B, providing for the specific form of the Parent Company Guarantees, the annexure contemplated that the Parent Company Guarantees would take the form recorded in [12] - [18] above.
[21] Subcontract art 2.1 GAB 203.
In relation to bank guarantees, art 35.1 and art 35.3 relevantly provide:
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.
…
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).
To be satisfactory for the purposes of the Subcontract, a bank guarantee had to meet, among other things, the requirements of art 35.1(a)(i) and (iii). The pro-forma bank guarantees in annexure 1A were approved for this purpose; but, unlike the Parent Company Guarantees, a bank guarantee could take a different form to the pro-formas provided that it met the form requirements as specified in art 35.1(a). Annexure 1A provides for two different forms.[22] The approved forms for a bank guarantee are discussed at [40] - [42] below.
[22] Subcontract annexure 1A GAB 361 - 370.
JKC relied on the circumstance that art 35.1(a)(iv) provided that all costs incidental to the issue and maintaining of the bank guarantees were to be borne by the Subcontractor and were deemed to be included in the Subcontract price. The suggestion was that, unlike the bank guarantees which came at a cost to the Subcontractor, the Parent Company Guarantees were beneficial because they were without cost.
Based on its text, art 35.3, while headed 'Demands', applied only to the bank guarantees. In context that makes sense when it is recalled that recourse to the bank guarantees is a matter as between JKC and the Subcontractor. Thus it could be addressed in the Subcontract. By contrast, the Parent Company Guarantees created rights and obligations between JKC and the respondents. As the respondents are not parties to the Subcontract, there would not ordinarily be an expectation that the Subcontract would make provision for recourse under the Parent Company Guarantees. Rather, it is to be expected that the Parent Company Guarantees, as self-contained instruments, would deal with recourse as between JKC and each respondent.
Despite those observations in the context of art 35.3, art 35.4 applies to both bank guarantees and the Parent Company Guarantees. It 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. (emphasis added)
JKC relied heavily on art 35.4. It was said to inform - in the sense of providing context for - the proper construction of cl 3 of the Parent Company Guarantees. Senior counsel for JKC sought to draw at least two things from art 35.4. First, so far as art 35.4 applied equally to the bank guarantees and the Parent Company Guarantees, art 35.4 was said to demonstrate the functional equivalence of the two instruments.[23] Second, art 35.4 was said to identify the possibility of a surplus if a Parent Company Guarantee was called upon - thereby, according to the submission, revealing that the Parent Company Guarantees provide a provisional remedy and evince a purpose of risk allocation pending determination of any dispute. Senior counsel for JKC said that, on the respondents' construction of cl 3, art 35.4 and its reference to the Parent Company Guarantees did not work.[24]
[23] Appeal ts 30, 34 - 35.
[24] Appeal ts 34 - 35, 54.
The bank guarantees and Parent Company Guarantees were not the only forms of guarantee mentioned in the Subcontract. Article 34.9(b)(v) made provision for an 'Advance Payment Guarantee' - an unconditional and irrevocable guarantee to be provided by an approved bank, insurance company or other financial institution in relation to an advance payment to be paid by JKC to the Subcontractor as an interest free loan. This was to be in the form set out in annexure 1C. The pro‑forma in annexure 1C bears a strong resemblance to the bank guarantees in annexure 1A.
Also mentioned, and relied on by JKC by way of contrasting its terms with those of the Parent Company Guarantees,[25] was a 'Contractor Payment Guarantee'. This was a guarantee to be provided as to JKC's payment obligation in favour of the Subcontractor in the form in annexure 1D (see art 35A(a)). Senior counsel for JKC set some store on the circumstance that this guarantee may not expire until 12 years after termination of the Subcontract. The language of the Contractor Payment Guarantee is so different from that of the Parent Company Guarantees that nothing of substance can be derived from close consideration of the terms of the former (other than to highlight that the respective guarantees were bespoke and not reciprocal). There is, for example, no equivalent to cl 3 of the Parent Company Guarantees in the Contractor Payment Guarantee. It is also necessary, under the Contractor Payment Guarantee, to first make demand on JKC (cl 7) and the guarantee is only in respect of default in payment obligations (cl 1).

Article 50 of the Subcontract

[25] Appeal ts 35 - 37.

JKC's costs claim against the Subcontractor is grounded in art 50.5(c) of the Subcontract. Accordingly, it is necessary to consider art 50. Article 50 is headed 'Defective Performance: Suspension - Termination - Take-Over'. Article 50.1 provides for JKC to notify the Subcontractor of material breaches. Article 50.2 is headed 'Rights of Contractor in case of Subcontractor's default'. Where the Subcontractor fails to remedy a breach (art 50.2(a)(i)) or commits a breach that in JKC's reasonable opinion appears to be incapable of being remedied or being repaired within a reasonable period of time (art 50.2(a)(ii)), then JKC may, by art 50.2(a) (subject to an exception that is presently irrelevant):
(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.
JKC's case is that, by a letter dated 30 January 2017, it terminated the Subcontract by acceptance of the Subcontractor's repudiation, further or alternatively, pursuant to art 50.2(a)(iv) as read with art 50.2(a)(ii).[26] JKC then relies on art 50.4(a) which provides:
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.
[26] Appellant's statement of claim dated 23 November 2018 pars 6(b) - (c), 10 BAB 61 - 62, 64 - 65. See also the terms of the costs claims (eg GAB 640) and the demands on the respondents (eg GAB 662).
In short, in the event of certain breaches, JKC was entitled to terminate the Subcontract or take-over the uncompleted works (art 50.2(a)). In either case JKC could then complete or have completed the outstanding works at the Subcontractor's cost (art 50.4(a)). JKC says that it has terminated and has then proceeded with completion of the works. In the arbitration, JKC seeks reimbursement of its costs and expenses in so completing the works. In this regard art 50.5 provides:
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. (emphasis added)
As mentioned, the Subcontractor disputes that it has any liability to JKC under art 50.5(c) of the Subcontract. By art 57(d), where the parties fail to settle a dispute by negotiation within 35 days, it is to be referred to an international arbitration. Article 57(d) then provides that '[a]ll disputes are to be settled by final and binding arbitration'. It will be recalled that, by cl 6.3 of the Parent Company Guarantees, the respondents are bound by the outcome of this dispute resolution process.

The approved terms for a bank guarantee

Article 35.1(a)(iii) provides for approval of the forms of bank guarantee in annexure 1A. There are two forms in annexure 1A. While two forms are provided the approved terms are substantially the same.[27]
[27] The material differences appear to be twofold. First, form 1 provides that the guarantee may not be transferred (cl 10); this is not the case with form 2: compare GAB 363, 368. Second, form 2, but not form 1, allows the guarantor to pay out and thereby discharge the guarantee (cl 12): compare GAB 364, 368 - 369.
The approved forms of bank guarantee included these clauses:
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. (emphasis added)
The bank guarantees as provided by the Subcontractor were in evidence before the primary judge.[28] In a finding that is unchallenged on appeal his Honour held that they were in the prescribed form.[29] The bank guarantees to be provided in accordance with the Subcontract were to be of a limited duration (art 35.1(c); annexure 1A forms 1 and 2 cl 11(b)).
[28] Exhibit 3 GAB 539 - 621.
[29] Primary reasons [42].
This form of bank guarantee was considered in CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [No 2][30] in the context of an appeal against the refusal of an application by a subcontractor (CPB Contractors Pty Ltd) seeking an interlocutory injunction restraining JKC from demanding payment by a bank under the guarantee. The litigation also involved the Ichthys Project. The pro-forma bank guarantee terms were relevantly identical to those contemplated by the Subcontract.[31] Similarly, the terms of CPB Contractors Pty Ltd's subcontract dealing with the form of the bank guarantee[32] - and the provision of its subcontract providing for recourse to the bank guarantee[33] - were materially the same as the equivalent terms of the Subcontract.
[30] CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [No 2] [2017] WASCA 123.
[31] CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [No 2] [24]. Compare [41] above.
[32] CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [No 2] [23]. Compare [28] above.
[33] CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [No 2] [28]. Compare [28] and [32] above.
This court held that on the proper construction of that subcontract the fact that the subcontractor disputed its liability would not affect the availability of JKC's remedy to have recourse to the bank guarantee. In doing so the court referred to, among other things, the equivalent to art 35.3(a) and art 35.3(b)[34] and JKC's right to deduct from the proceeds of the bank guarantee (the equivalent to art 35.4(a)).[35] Article 35.4 was described as a 'procedural provision' giving effect to the exercise of power under art 35.3(a).[36] One feature of the form of the bank guarantee which was relevant in coming to the eventual construction conclusion was that the bank guarantee was of limited duration.[37]
[34] CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [No 2] [90] - [98], [104], [128].
[35] CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [No 2] [131].
[36] CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [No 2] [128].
[37] CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [No 2] [106] - [113].

The parties' construction of the Parent Company Guarantees

In due course it will be necessary to summarise the parties' submissions in support of their preferred construction of the Parent Company Guarantees. For now it will aid understanding of the primary judge's determination and the issues on appeal if there is an outline of the competing constructions as to cl 3 of the Parent Company Guarantees.

JKC's preferred construction

On JKC's preferred construction, cl 3 of the Parent Company Guarantees creates an independent right and obligation additional to other provisions within the instrument such as cl 2 (the guarantee clause) and cl 6.5 (the indemnity clause).[38] It is said to augment JKC's rights;[39] and not to be a mere mechanistic device which imposes an additional pre-condition to the operation of cl 2 (which would render it redundant).[40] JKC says that, unlike cl 2, cl 3 is not subject to cl 9.2.[41] Clause 3 is contended to be a 'provisional' remedy as the obligation to act arises before any default by the Subcontractor is objectively determined[42] (being pre-conditioned only by JKC's reasonable opinion - reasonableness being said to 'condition and control' the operation of cl 3[43] - and the issue of a written notice). If, subsequently, it is determined that there was no default, or the default was to a lesser extent than was specified in a notice under cl 3, then there must be an account.[44]
[38] Appellant's submissions par 18 WAB 7; Appeal ts 18 - 20, 30, 37 - 38, 54 - 55, 80 - 81.
[39] Appellant's submissions par 24 WAB 9.
[40] Appeal ts 17, 20, 37, 51, 54 - 55.
[41] Appellant's submissions par 44 WAB 12.
[42] Appellant's submissions pars 18 - 19 WAB 7; Appeal ts 18, 21, 30, 35, 37 - 39, 43, 48, 50.
[43] Appeal ts 42.
[44] Appellant's submissions par 19 WAB 7 - 8.
In referring to cl 3 as provisional, JKC relied on the circumstance that the obligation arises on satisfaction of a 'lower standard', namely, that in JKC's reasonable opinion there has been a failure to perform an obligation or discharge a liability under the Subcontract.[45] JKC argued that cl 2, to which cl 9.2 unambiguously applies, is concerned with actual liability, whereas cl 3 - activated merely on a 'reasonable opinion' - was concerned with provisional identification of liability, which also explained why cl 9.2 did not apply to cl 3.[46] JKC said that as cl 3 created a provisional remedy, conditioned merely by its reasonable opinion, cl 9.2 could not apply as it would render cl 3 inoperative.[47]
[45] Appellant's submissions par 19 WAB 7; Appeal ts 38, 40 - 41; 50 - 51.
[46] Appeal ts 48.
[47] Appeal ts 43.
Relying on the text of cl 3, JKC contended that cl 3 does not depend on actual liability or proof of default on the part of the Subcontractor.[48] Rather, according to JKC's preferred construction, on formation of the requisite 'reasonable opinion' and receipt of a notice pursuant to cl 3 of the Parent Company Guarantees, a respondent 'must' act and 'continue' to act as is required by JKC. According to JKC the only two preconditions are:[49]
1.The formation by JKC of a reasonable opinion that the Subcontractor is in default (in the language of cl 3 that 'the Subcontractor [has] fail[ed] to perform any of the Subcontractor's obligations or discharge any of the Subcontractor's liabilities under the Subcontract').
2.The delivery of a written notice requiring the respondent to perform the obligations or discharge the liabilities that, in JKC's reasonable opinion, are outstanding.
[48] Appellant's submissions par 21 WAB 8.
[49] Appellant's submissions par 20 WAB 8; Appeal ts 19, 21, 29, 38.
In support of its preferred construction, JKC characterised cl 3 as a 'risk allocation device'.[50] JKC also argued that the Parent Company Guarantees are deeds that are 'functionally equivalent to a bank guarantee'.[51] JKC said that cl 3 covers payment obligations[52] and provided for a continuing obligation that extended beyond termination of the Subcontract.[53]
[50] Appellant's submissions par 21 WAB 8; Appeal ts 35.
[51] Appellant's submissions par 74 WAB 17; Appeal ts 21, 30, 34.
[52] Appellant's submissions par 89 WAB 20; Appeal ts 19, 38, 52 - 53.
[53] Appellant's submissions par 111 WAB 23; Appeal ts 21, 24, 77 - 81.
In that latter respect, JKC contended that recourse of a provisional nature must be available after assertion of termination of the Subcontract so as not to denude the right of commercial utility.[54] So far as cl 3 required the respondents to perform obligations and discharge liabilities until 'termination … or otherwise' the requirement was said to continue until, in JKC's reasonable opinion, all the works under the Subcontract had been satisfactorily completed and any claims made by JKC against the Subcontractor had been satisfied.[55] It was submitted that the words were directed to assessing how far the respondents must perform.[56] In support of its view that, on the proper construction of cl 3, JKC could require the respondents to pay for everything until a binding determination, JKC relied on the language of reasonable opinion as providing an agreed basis whereby it might require the respondents to perform obligations and discharge liabilities pending arbitral determination.[57]
[54] Appeal ts 21, 25 - 26, 29 - 30.
[55] Appeal ts 28 - 29.
[56] Appeal ts 24.
[57] Appeal ts 40 - 41.
JKC, by its senior counsel, went as far as to say that the respondents' liability under cl 3 of the Parent Company Guarantee was uncapped and liable to potentially equal or exceed the entirety of the contract price.[58]

The respondents' preferred construction

[58] Appeal ts 41.

The respondents denied that cl 3 of the Parent Company Guarantees created an obligation on the respondents to 'pay now, argue later' that is not the subject of any available defence, set-off or counterclaim.[59]
[59] Respondents' submissions pars 10 - 12 WAB 32.
Before the primary judge, and in written submissions in their respondent's answer on appeal, the respondents contended that cl 2 was the primary provision containing the substantive content of the respondents' guarantee obligations under the Parent Company Guarantees. By contrast, cl 3 was said to be a mechanistic provision for the operation of cl 2 which conferred no independent or substantive rights. On the respondents' then preferred construction, cl 3 was procedural rather than substantive and provided the mechanism by which certain of JKC's rights under the guarantee were to be activated.[60] It was said to operate as a sub-set of the rights under cl 2 in respect of the respondents' obligations to take over the works prior to the termination of the Subcontract.[61]
[60] Respondents' submissions par 41 WAB 40.
[61] Respondents' submissions par 47 WAB 42.
Upon the hearing of the appeal, however, senior counsel for the respondents informed the court that the respondents no longer pressed the proposition that cl 3 was a mere mechanistic provision.[62]
[62] Appeal ts 59.
Instead the respondents explained their preferred construction on the basis that cl 3 was an independent right which had a separate operation to cl 2 (cl 2 being characterised as a 'money clause').[63] According to the respondents, cl 3, on engagement, required the respondents to step in and actually perform or cause to be performed the obligations and discharge the liabilities of the Subcontractor under the Subcontract that were the subject of the notice under cl 3. The respondents had to perform and discharge as if they were the Subcontractor and were thus subject to the relevant obligations and liabilities as if they were the Subcontractor. However, the respondents had no greater commitment than the Subcontractor - what must be performed, and discharged, were those same obligations and liabilities which the Subcontractor had and continued to have under the Subcontract. Moreover, the respondents were only required to do so until the termination of the Subcontract.[64]
[63] Appeal ts 66.
[64] Appeal ts 59 - 60, 68, 69. See also Appeal ts 18, 20, 37 - 38 (so far as the respondents' change in position was based on the court's observations as to whether cl 3 was a mechanistic provision).
Thus, on the respondents' preferred construction, cl 3 was concerned with the obligation to perform the Subcontract, or cause the Subcontract to be performed, and to discharge liabilities under the Subcontract. However, cl 3 was said not to apply to post-termination payment obligations.[65]
[65] Respondents' submissions par 61 WAB 48.

The primary judge's determination

JKC did not bring proceedings to enforce the Parent Company Guarantees. Rather, JKC commenced proceedings by originating summons dated 6 September 2018 seeking declarations as to the proper construction of the Parent Company Guarantees.[66] The primary judge ordered that the parties file pleadings.[67] JKC's statement of claim contained a new formulation of the declarations sought as to the proper construction of the Parent Company Guarantees.[68] At trial the declarations sought took a different form again. JKC sought declarations that on the proper construction of the Parent Company Guarantees:
(i)The Guarantors' liability under cl 3 of the [Parent Company Guarantees] is not, by reason of cl 2 and cl 9.2 of the [Parent Company Guarantees], conditional on the determination of any defence, set-off or counterclaim asserted by the Guarantors;
(ii)cl 3 of the [Parent Company Guarantees] 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 [Parent Company Guarantees] 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 [Parent Company Guarantees], 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.[69]
[66] BAB 55 - 58.
[67] Primary reasons [17]. See BAB 59 - 69 (appellant's statement of claim dated 23 September 2018); BAB 70 - 78 (respondents' defence).
[68] Appellant's statement of claim, prayer for relief par (a) BAB 68 - 69.
[69] Appellant's minute of amended proposed declarations dated 1 March 2019 BAB 79 - 80.
The primary judge dismissed the claim for declarations in those terms. His Honour concluded that:
1.As to (i), the Parent Company Guarantees did not create a 'pay now, argue later' obligation in cl 3 or elsewhere.[70] The primary judge considered that:
(a)the Parent Company Guarantees were to provide security, but were not a risk allocation device;[71]
(b)clause 9.2 applied to the Parent Company Guarantees as a whole;[72]
(c)clause 2 was the primary provision;[73] and
(d)clause 3 of the Parent Company Guarantees was a 'mechanistic provision' for the operation of cl 2 and did not operate separately and independently of cl 2.[74]
2.As to (ii), the operation of cl 3 is confined to performance obligations, ie the obligation to actually perform or cause the Subcontract to be performed.[75]
3.As to (iii), JKC could only invoke cl 3 until termination of the Subcontract.[76]
4.As to (iv), declaratory relief in those terms would not be appropriate in any event as it would involve the court giving a purely advisory opinion in the absence of a proper factual context.[77] In that respect it also lacked utility.[78]
[70] Primary reasons [128], [181].
[71] Primary reasons [129(a)]. See also [151] - [152].
[72] Primary reasons [129(b)]. See also [155] - [164].
[73] Primary reasons [169].
[74] Primary reasons [129(c)]. See also [165] - [173].
[75] Primary reasons [201], [205] - [206], [208].
[76] Primary reasons [201], [205] - [206], [208].
[77] Primary reasons [187], [214] - [217].
[78] Primary reasons [214].
The primary judge explained his construction of cl 3 in these terms:
It is … 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 require 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.[79]
[79] Primary reasons [206] - [207].
In written submissions JKC contended that the primary judge did not follow an established approach to construction and adopted an unconventional approach.[80] We do not accept that submission. His Honour referred to the leading High Court authorities on the general principles that apply in relation to the construction of commercial contracts.[81] In our view, read fairly and as a whole, the primary judge approached the task of construing the Parent Company Guarantees in accordance with those authorities. In any case nothing is gained by analysing, as JKC seeks to do from time to time, the validity of particular aspects of the primary judge's reasoning in coming to a conclusion on the constructional questions before him. There is only one true construction.[82] Accordingly, the task for this court in an appeal concerning the construction of an instrument is to determine for itself the correct construction of the instrument.[83]
[80] Appellant's submissions pars 33 - 34 WAB 10.
[81] Primary reasons [82] - [83].
[82] Life Insurance Co of Australia Ltd v Phillips [1925] HCA 18; (1925) 36 CLR 60, 78 - 79.
[83] Tokio Marine & Nichido Fire Insurance Co Ltd v Hans Bo Kristian Holgersson trading as Holgerssons Complete Home Service [2019] WASCA 114 [47] (note also the authorities referred to at fn 138). See also: Sino Iron Pty Ltd v Mineralogy Pty Ltd [2019] WASCA 80 [172]; Dicom AWT Operations Pty Ltd v City of Stirling [2019] WASCA 117 [100].
This requires the court to consider for itself the parties' competing constructions of the Parent Company Guarantees. There is no need, and it may distract, to address allegations of specific error in approach by the primary judge. That said, given the detailed consideration that his Honour had to the competing arguments, and that those arguments are substantially repeated in this court with the respondents adopting much (but not all) of the primary reasons, there are occasions where it is appropriate to have regard to the primary judge's reasoning. In the main, however, the appeal ought to be approached by assessing whether JKC's contended for construction of the Parent Company Guarantees is correct.

The grounds of appeal

On appeal JKC contended in its grounds of appeal that the primary judge erred in law in holding that:
1.The Parent Company Guarantees did not require each respondent to meet a liability, identified in a notice issued by JKC, upon the formation of a reasonable opinion that the Subcontractor failed to discharge a liability under the Subcontract (ground 1).
2.Clause 3 of the Parent Company Guarantees is concerned exclusively with obligations physically to perform works and does not address any type of payment obligation (ground 2).
3.Each respondent's obligation under cl 3 of the Parent Company Guarantees ceased to operate after termination of the Subcontract (ground 3).
Ground 2 addresses the primary judge's refusal to make the declaration referred to in [57(ii)] above and ground 3 the declaration referred to in [57(iii)] above. Although not in the same terms, and in part echoing the test for 'reasonable opinion' sought to be agitated in [57(iv] above, ground 1 is associated with the primary judge's refusal to make the declaration in [57(i)] above. In this respect what is sought on appeal is yet another form of declaration, namely, that it be declared that:
clause 3 of the [Parent Company Guarantees] creates independent rights and obligations, and requires each [respondent] to immediately discharge a liability as required in a notice issued by JKC, based upon a reasonable opinion that the Subcontractor has failed to discharge the liability;[84]
[84] Appellant's orders wanted par 2(a)(i) WAB 26.
The formulation is consistent with JKC's position, as advanced before the primary judge, that the respondents' liability under cl 3 of the Parent Company Guarantees is not conditional on the determination of any defence, set-off or counterclaim that the Subcontractor could assert. Similarly, on JKC's case, it has always been the position that the respondents' liability is not dependent on a conclusively established liability on the part of the Subcontractor. The primary judge observed that the first proposed declaration, as set out in [57(i)] above, did not quite capture the nature of the issues between the parties.[85] The recast formulation in [63] above appears to be an attempt to meet that shortcoming.
[85] Primary reasons [20].
The respondents contested each ground. The respondents also contended, by notice of contention, that the primary judge's decision to refuse the first declaration should be affirmed on an additional ground. The respondents claimed that the primary judge should have refused the first declaration on the grounds that it lacked utility and should be refused on discretionary grounds.

Construction of contracts: legal principles

There was no real difference between the parties as to the general principles applicable to the construction of commercial instruments. Notwithstanding that the principles are settled, it is useful to repeat them before turning to the parties' detailed submissions on the constructional issues that arise in the present case. In so doing it is also worthwhile to touch on some of the authorities concerning recourse to bank guarantees and similar instruments where provided in the context of a construction contract. That is necessary as it was a key plank of JKC's argument that the Parent Company Guarantees were provided in accordance with the Subcontract in a similar way that the Subcontractor provided the bank guarantees as and by way of a performance bond.

Construction of commercial contracts: general principles

Interpreting a commercial document requires attention to the language used by the parties, the commercial circumstances which the document addresses and the objects which it is intended to secure.[86] In that regard the general principles that apply in construing a commercial contract are well-established:[87]
1.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) and purpose.
2.In determining the meaning of the terms of a commercial contract it is necessary to ask what a reasonable business person would have understood the terms to mean. That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purposes or objects to be secured by the contract.
3.The court approaches the task of giving a commercial contract an interpretation on the assumption that the parties intended to produce a commercial result - one which makes commercial sense. (This has been said to require that the construction to be placed on the relevant provision be consistent with the commercial object of the agreement.)[88] Thus a commercial contract should be construed so as to avoid it making commercial nonsense or working commercial inconvenience.
4.Ordinarily the process of construction is possible by reference to the contract alone.
5.However, sometimes recourse to external events, circumstances or things is necessary; for example, to identify the commercial purpose or objects of the contract (by reference to the genesis of the transaction, the background, the context and the market in which the parties are operating) or to determine the proper construction where there is a constructional choice due to ambiguity.
[86] McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579 [22]; Wilkie v Gordian Runoff Ltd [2005] HCA 17; (2005) 221 CLR 522 [15].
[87] Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640 [35]; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 256 CLR 104 [46] ‑ [52].
[88] Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd [2017] HCA 12; (2017) 261 CLR 544 [17].

The first of these principles illustrates the danger in construing a contractual provision selectively. An instrument must be construed as a whole.[89] A construction that makes the various parts of an instrument harmonious is preferable. If possible, each part of an instrument should be construed so as to have some operation.[90] Preference will be given to a construction supplying a congruent operation to the various components of the contract as a whole.[91]
[89] Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99, 109.
[90] Black Box Control Pty Ltd v TerraVision Pty Ltd [2016] WASCA 219 [42(10)].
[91] Wilkie v Gordian Runoff Ltd [16].
Identification of the purposes or objects intended to be secured by a commercial contract will usually be inferred from the express or implied terms of the contractual instrument and any admissible evidence as to the surrounding circumstances.[92] Often it will be apparent from a consideration of the contractual provisions read as a whole. [93] In any case the purpose and object of a transaction is ascertained objectively by considering what a reasonable observer, in the situation of the parties, would conclude was the purpose and object.[94] Thus the purpose or object of contractual provisions is revealed by their text and structure. It should be derived from what the contract says and not from any assumption about the desired or desirable reach of the operation of the relevant provisions. However, extrinsic evidence may assist where the task is facilitated by an understanding of the genesis of the transaction, its background, the context and the market in which the parties are operating.[95]
[92] Olympic Holdings Pty Ltd v Windslow Corporation Pty Ltd (in liq) [2008] WASCA 80; (2008) 36 WAR 342 [41].
[93] Black Box Control Pty Ltd v TerraVision Pty Ltd [42(3)].
[94] Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65; (2007) 69 NSWLR 603 [264]. See also at [265].
[95] Electricity Generation Corporation v Woodside Energy Ltd [35].
In acknowledging the accepted wisdom that a commercial contract must be construed so as to avoid it making commercial nonsense or working commercial inconvenience it must also be kept in mind that reasonable minds might differ on business common sense.[96] Nevertheless it is accepted that:
[I]f the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, 'even though the construction adopted is not the most obvious, or the most grammatically accurate' …[97]
[96] Black Box Control Pty Ltd v TerraVision Pty Ltd [42(9)].
[97] Australian Broadcasting Commission v Australasian Performing Right Association Ltd (109).
Where constructional choice is available it is important to consider what a reasonable business person reading the relevant clause or agreement would understand it to mean.[98] It is from that perspective that the court considers the circumstances surrounding the contract and the commercial purposes and objects to be achieved by it.[99]
[98] Sino Iron Pty Ltd v Mineralogy Pty Ltd [298].
[99] Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [47]; Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd [16].
A contract should be construed practically so as to give better effect to its commercial purpose. The law seeks to uphold commercial contractual obligations and the expectations that derive from them. The court should not adopt a narrow or pedantic approach to construction, particularly in the case of commercial arrangements.[100]

Construction of performance bonds and guarantees: specific principles

Approach to construction of other guarantees of limited usefulness

[100] Mineralogy Pty Ltd v The State of Western Australia [2005] WASCA 69 [15].

Before the primary judge, and again before this court, the parties referred to a number of decisions concerning the construction of specific performance bonds and guarantees, and also contracts providing for the recourse to such instruments. While the principles to be drawn from those authorities should be mentioned, none of the authorities are determinative. There are two general reasons why this is the case.
First, even though the authorities suggest that certain features are often considered to be of significance in construing such instruments, it remains the case that the usual process of construction applies.[101] There is, for example, no separate rule of construction about contracts which provide for the issue of performance bonds.[102] Accordingly, the general principles referred to at [67] - [72] above provide the appropriate legal framework for consideration of the constructional questions that arise for the court's determination in the appeal.
[101] CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [No 2] [85], [88]; Kawasaki Heavy Industries Ltd v Laing O'Rourke Australia Construction Pty Ltd [2017] NSWCA 291; (2017) 96 NSWLR 329 [60] ‑ [67].
[102] Kawasaki Heavy Industries Ltd v Laing O'Rourke Australia Construction Pty Ltd [64] - [65], [67].
As was said by Kaye JA in Dedert Corporation v United Dalby Bio‑Refinery Pty Ltd in considering whether an interlocutory injunction should be granted to restrain a principal having recourse to a bank guarantee provided by a contractor in accordance with the contract between the principal and the contractor:
In construing the rights and liabilities of the parties under the contract, it is necessary to have reference to the precise terms in which the relevant clauses of the contract are expressed, their context in the contract as a whole, and the purpose of the contract.[103]
[103] Dedert Corporation v United Dalby Bio-Refinery Pty Ltd [2017] VSCA 368 [103].
Similarly, when such a question arose in this court in CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [No 2] in the context of an application by a sub-contractor to restrain recourse by a contractor, the court said that the resolution of the appeal lay in the proper construction of the subcontract in question rather than attempting to state broad principles of general application.[104]
[104] CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [No 2] [88]. See also at [85].
Second, as is evident from what is referred to in [75] - [76] above, many of the cases are concerned with the proper construction of a contract making provision for recourse to the performance bond or guarantee rather than the performance bond or guarantee itself. In that connection it is established that, in construing the contract, the unconditional nature of a performance bond, and its terms, can be taken into account where the contract attaches and approves the form of the bond.[105] However, the terms of the performance bond do not control the question of construction.[106]
[105] CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [No 2] [89]; Dedert Corporation v United Dalby Bio-Refinery Pty Ltd [145].
[106] CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [No 2] [89].
In the present case the ultimate constructional issues for determination are not ones as to the proper construction of the Subcontract. Moreover, the questions for determination require the court to construe the Parent Company Guarantees - a matter as between JKC and the respondents rather than JKC and the Subcontractor. It is not a case of construing the provisions of the Subcontract informed by the terms of the approved form of the bank guarantees. The Parent Company Guarantees are separate and distinct instruments from the Subcontract. Unlike the Subcontract, which is lengthy and detailed - often providing for very specific contractual obligations, the Parent Company Guarantees are relatively brief and more general in their drafting.
Those differences suggest that the Subcontract will be of lesser contextual significance for the proper construction of the Parent Company Guarantees than might be the case where, as between JKC and the Subcontractor, the proper construction of some aspect of art 35 of the Subcontract might be assisted by consideration of the approved terms of the pro-forma bank guarantee in annexure 1A.
That said, both parties submitted that in construing the Parent Company Guarantees part of the relevant context that informed the constructional task was the Subcontract.[107] That must be accepted for at least two reasons. First, the recitals refer to the Subcontract and the requirement under the Subcontract that the respondents enter into the Parent Company Guarantees. That alone suffices to allow reference to the Subcontract.[108] Second, as the instruments were executed at around the same time, and were to implement the one commercial transaction, they may be read together for the purpose of determining their proper construction and legal effect.[109] It does not matter that the instruments were between different parties where, as here, the contents were known to all.[110]
[107] Appeal ts 32 - 33, 67.
[108] Black Box Control Pty Ltd v TerraVision Pty Ltd [41(6)].
[109] EDWF Holdings 1 Pty Ltd v EDWF Holdings 2 Pty Ltd [2010] WASCA 78; (2010) 41 WAR 23 [104].
[110] McVeigh v National Australia Bank Ltd [2000] FCA 187; (2000) 278 ALR 429 [30] - [34], [77].
Accordingly, the Subcontract is relevant context which may inform the construction of the Parent Company Guarantees. However, the significance to be ascribed to the provisions of the Subcontract must be carefully considered and it ought not be assumed that there is significance. Moreover, as senior counsel for JKC accepted,[111] the terms of the Subcontract cannot control the meaning of the provisions in the Parent Company Guarantees.

Performance bonds and guarantees: specific principles

[111] Appeal ts 33.

While, for those reasons, the task of contractual construction requires close consideration of the specific provisions of the Parent Company Guarantees, the relevant authorities state some principles that are uncontroversial. Specifically:
1.Where security is provided by means of procuring that a financial institution provide a performance bond (to use the correct legal terminology rather than the more colloquial 'bank guarantee'), the institution's unconditional promise to pay the beneficiary on demand has the character of cash in many respects.[112]
2.The court should not too readily favour a construction which is inconsistent with an agreed allocation of risk as to who is to be out of pocket pending resolution of a dispute.[113] However, whether an instrument has a purpose of allocating risk pending determination of a dispute cannot be assumed. It is to be identified as a matter of contractual construction.[114] The description 'risk allocation device' expresses a process of conclusion after the process of construction has been worked through.[115]
3.The fact that a guarantee is required to be unconditional is one factor which may lead to the conclusion that the intention of the parties was to allocate risk.[116] Thus the typical language of a performance bond (where appended to the underlying contract so as to constitute an approved form for the purposes of the contract) may provide a reason to conclude that the contract between principal and contractor is to have the consequence that the bond is to operate as a risk allocation device.[117]
4.Similarly, contractual prohibitions or limitations on seeking an injunction restraining a party's recourse to a performance bond may inform the purpose of the right to recourse.[118] Such clauses support a purpose of risk allocation pending dispute resolution in addition to the purpose of security as they otherwise make no sense and serve no purpose.[119]
[112] CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [No 2] [84].
[113] Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812, 827; Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd [2008] FCAFC 136; (2008) 249 ALR 458 [82]; Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [2015] VSCA 98 [138(4)]; Dedert Corporation v United Dalby Bio-Refinery Pty Ltd [103].
[114] Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd (826 - 827); Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd [82]; see also at [77]; CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [No 2] [85] - [86].
[115] Kawasaki Heavy Industries Ltd v Laing O'Rourke Australia Construction Pty Ltd [59]; see also at [62], [67].
[116] See eg Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd (821 - 822), (828 - 829); Bachmann Pty Ltd v BHP Power New Zealand Ltd [1998] VSCA 40; [1999] 1 VR 420 [49] - [50], [54]; Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd [88], [90] - [100]; Dedert Corporation v United Dalby Bio-Refinery Pty Ltd [47].
[117] Kawasaki Heavy Industries Ltd v Laing O'Rourke Australia Construction Pty Ltd [67].
[118] CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [No 2] [93].
[119] CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [No 2] [90] - [93].
The first of those principles requires some amplification. Performance bonds (sometimes - as in the Subcontract - called bank guarantees) are typically issued by financial institutions at the request of one party to a contract in favour of another party pursuant to a requirement of the contract. Such instruments commonly take the form of a promise by the issuer that it will pay, to the named beneficiary, an amount up to a limit unconditionally or on specified conditions, and do so without reference to the terms of the contract requiring its provision.[120] It is accepted that the commercial purpose of a performance bond is to provide an equivalent to cash.[121] To introduce a qualification on the entitlement of a holder to call upon a performance bond would be to deprive the instrument of the quality which gives it commercial currency.[122] The commitment does not involve any obligation or right of suretyship.[123]
[120] Simic v New South Wales Land and Housing Corporation [2016] HCA 47; (2006) 260 CLR 85 [2], [85]. See also at [8].
[121] Simic v New South Wales Land and Housing Corporation [5] (referring to Wood Hall Ltd v Pipeline Authority [1979] HCA 21; (1979) 141 CLR 443, 445, 453 - 454, 457 - 458, [85], [88]).
[122] Wood Hall Ltd v Pipeline Authority (457).
[123] Simic v New South Wales Land and Housing Corporation [80].
Something further also needs to be said about identifying a purpose of 'risk allocation'.
On occasions, JKC's submissions suggested that so far as the Parent Company Guarantees provided for the respondents to assume a liability there was an allocation of risk.[124] While, broadly speaking, that is correct - a party becomes 'on risk' having assumed a liability - that is not the sense in which 'risk allocation' is being referred to in this particular context. Rather, it is to distinguish between those performance bonds and guarantees provided for the purpose of security and those which serve an additional purpose of allocating risk pending determination of a dispute. The latter involves a contractual stipulation as to the party who is to bear a loss pending the resolution of any dispute. The distinction is explained by Callaway JA in Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd:
There are broadly two reasons why the beneficiary may have stipulated for a guarantee [here referring to a guarantee in the nature of a performance bond]. 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.[125]
[124] See eg appellant's submissions par 81 WAB 19.
[125] Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd (826). To similar effect see Charles JA at (821). Callaway JA's formulation has been referred to with approval on numerous occasions. See eg Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd [79]; Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [20], [141]; CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [No 2] [86]; Dedert Corporation v United Dalby Bio-Refinery Pty Ltd [39], [104].
Thus the references in the authorities to one party being entitled to be 'in the money' pending resolution of a dispute;[126] and the more colourful 'pay now, argue later' that was employed by both parties in this appeal.
[126] See eg CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [No 2] [112].
It is, however, possible that a contract may so allocate risk but do so in a way that confines that allocation of risk to specific circumstances.[127] Also, the circumstance that a performance bond is intended to operate as a risk allocation device is not necessarily determinative of the right of a party to have recourse to it. For example, recourse may be subject to some express or implied contractual qualification or limitation.[128]
[127] See eg Dedert Corporation v United Dalby Bio-Refinery Pty Ltd [111].
[128] Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [25].
Paragraphs [82.3] and [82.4] above mention two contractual features that the authorities have relied on in identifying a purpose of risk allocation. It should not be thought that those two matters are always dispositive in favour of a conclusion of risk allocation. Nor do they exhaust the possible textual and transactional indicators of assistance in identifying whether, in addition to the provision of security, the requirement to provide a performance bond or guarantee serves an agreed purpose of risk allocation pending determination of a dispute.
Other contractual features which, in particular cases, have been identified as supporting a finding that there was a purpose of interim risk allocation include: provision within the contract for a certification procedure - thereby providing for an interim or provisional determination with some precision;[129] the manifestation of an objective contractual intention that recourse is available as a right of self-help;[130] the absence of any qualification to effecting recourse;[131] the presence of a procedural provision providing for the holder of the performance bond to hold the balance of the proceeds of a performance bond after conversion and deduction pending termination;[132] and provision for reimbursement if it is found, on a final determination, that there is no actual liability.[133] Also, where the approved form of the performance bond may be taken into account (or there is a term to the same effect in the contract) it is relevant that the pro-forma provides only for a performance bond with a limited duration, thereby negating a sole purpose of security and being consistent with the beneficiary being placed in the money to the extent of the bank guarantee pending resolution of a dispute).[134]
[129] Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd (822); CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [No 2] [126].
[130] Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd (822), (829); CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [No 2] [124] - [125], [134].
[131] Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd (822); compare Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [141] - [142].
[132] CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [No 2] [128] - [131].
[133] Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd (822 - 823). See also CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [No 2] [132].
[134] CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [No 2] [106] - [113]. See also Bachmann Pty Ltd v BHP Power New Zealand Ltd [55].
The contractual language employed by the parties remains all important in every case. For example, in one case it was significant that the holder of the performance bond only had to 'claim' an entitlement to a payment or reimbursement; recourse did not require it to establish or demonstrate an actual entitlement.[135] So too, as a textual consideration, the words 'on demand' were found in another case to support a construction that one party may immediately recover an amount by merely making demand under the performance bond without notice to the other party.[136]
[135] Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [141].
[136] CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [No 2] [104].

JKC relies heavily on these three features of cl 3 - the two preconditions and its mandatory nature - in support of its construction of cl 3.[296]
[296] See, for example, appeal ts 38 - 39.
In oral submissions, JKC contends that cl 3 gives rise to a provisional remedy in favour of JKC, pending the final resolution of disputes between JKC and the Subcontractor.[297] Clause 3 provides for a provisional remedy that enables it to have recourse against the Parent with respect to instances of a failure to perform by the Subcontractor, conditioned by the formation of a reasonable opinion by JKC. That recourse, of a provisional nature, is available to JKC even after the Subcontract has been terminated or asserted to have been terminated.[298]
[297] Appeal ts 17.
[298] Appeal ts 21; see also appellant's submissions par 112.
In explaining its preferred construction, JKC characterises cl 3 as a 'risk allocation device'.[299] JKC also argues that the Parent Company Guarantees are 'functionally equivalent to a bank guarantee'.[300]
[299] Appellant's submissions par 21.
[300] Appellant's submissions par 74; appeal ts 21, 34 - 35.

Disposition - reasons for preferring my construction to JKC's construction

Introductory overview

In my view, as explained below, linguistic and textual considerations overwhelmingly favour my preferred construction over JKC's construction. The ordinary meaning of the text of cl 3 supports and reflects my preferred construction. By contrast, JKC's construction requires a torturing of the language of cl 3. Further, considerations of coherence also favour my preferred construction.
Clause 3 of the Parent Company Guarantees can be divided into the following five parts:
(1)JKC must form the 'reasonable opinion' that the Subcontractor has failed to perform one or more of its obligations or discharge one or more of its liabilities under the Subcontract.
(2)JKC must issue a written notice to the relevant Parent requiring it to: (a) perform or cause to be performed those obligations; or (b) discharge those liabilities.
(3)The Parent 'must' do so. In other words, in accordance with the written notice the Parent 'must perform or cause to be performed those obligations or discharge those liabilities' which, in JKC's reasonable opinion, the Subcontractor has failed to perform or discharge.
(4)The Parent must continue to perform those obligations and discharge those liabilities 'until the termination of the Subcontract by the effluxion of time or otherwise'.
(5)JKC is not required to enforce its rights against the Subcontractor prior to having recourse to its rights against the relevant Parent.
In my view, as explained below, the language of the third part of cl 3 does not sit easily with JKC's construction; the language of the fourth part is entirely inconsistent with that construction.

Textual considerations - the third part of cl 3

In my view, the natural and ordinary meaning of the third part of the clause accords with and reflects my preferred construction. When it is activated, the effect of cl 3 is to require the Parent to step in and perform the obligation (or discharge the liability) which, in JKC's reasonable opinion, the Subcontractor has not performed. That does not require the Parent to do more than that which the Subcontractor is required, by the terms of the Subcontract, to do. To my mind, nothing in the language of cl 3 supports giving it a meaning by which the Parent becomes liable to 'provisionally' make a payment in relation to a liability that is disputed by the Subcontractor and which the Subcontractor would not be required to pay until the dispute is determined favourably to JKC.
In particular, the three features of cl 3 relied on by JKC, summarised at [252] above, fall well short of sustaining its construction. To the contrary, those features of the text and structure of cl 3 are entirely consistent with my preferred construction. The terms of the two preconditions are consistent with, and make sense in the context of, cl 3's evident purpose and effect. Its purpose and effect is to empower JKC to require the Parent to step in and become primarily liable to perform obligations or discharge liabilities which, in JKC's reasonable opinion, the Subcontractor has failed to perform or discharge, thereby providing JKC with an alternative means of obtaining the due performance of the Subcontractor's obligations (and discharge of its liabilities). The requirement of a reasonable opinion on the part of JKC reflects the contractual scheme - JKC has a contract with, and is entitled to performance by, the Subcontractor and can only become entitled to performance by the Parent after formation of the reasonable opinion referred to in cl 3. So too, the mandatory nature of the Parent's obligation, once cl 3 is engaged, is an element of my preferred construction.

Other considerations favouring my preferred construction

As I will explain, on my preferred construction, cl 3 does not encompass payment obligations. However, for the purposes of consideration of elements (4) and (5), I will assume, favourably to JKC, that cl 3 does apply to payment obligations. Even on that assumption, it is plainly not so limited. It encompasses all of the Subcontractor's obligations and liabilities. The words of the third part of cl 3 should be construed so as to give the clause a congruent operation in respect of all such obligations and liabilities. JKC's construction does not do that. In its application to payment obligations, JKC's construction requires the Parent to perform a payment obligation which is disputed by the Subcontractor, such payment being on a provisional basis pending resolution of the dispute between the Subcontractor and JKC. It is difficult to see, and JKC did not explain, how a like construction could be applied to other obligations owed by the Subcontractor. The notion of a provisional remedy does not readily make sense when applied to obligations to provide services.
By contrast, my preferred construction, set out in [245], gives rise to no such incongruence. And that is so even if cl 3 encompasses payment obligations. On my preferred construction, cl 3 operates coherently in relation to all obligations and liabilities encompassed by it.
Further, as the joint reasons explain at [183] ‑ [185], there is no mechanism in the Parent Guarantee, or in the Subcontract to which two of the Parents are not party, for a Parent to obtain reimbursement in relation to a payment, provisionally made under cl 3, for which the Subcontractor was not, on a proper analysis, liable. For the reasons given by Buss P and Vaughan JA, and by the primary judge,[301] the absence of any such mechanism, and the convoluted and indirect nature of the mechanism contended by JKC to be available, is a further consideration counting against JKC's construction.

Textual considerations - the fourth part of cl 3

[301] Primary reasons [172] ‑ [173].

That brings me to the fourth part of cl 3 - its concluding words, 'until the termination of the Subcontract by the effluxion of time or otherwise'.
In response to the primary judge's conclusion that, given its concluding words, cl 3 could not be invoked after termination of the Subcontract, JKC suggests that it would be extraordinary if the right ceased to operate in 'exactly the situation where it was most needed'.[302] To so conclude would be to 'entirely denude' it of any utility.[303] JKC submits that the concluding words should be read on the basis that the phrase is an 'adverbial clause of time' setting out the required duration of performance[304] rather than designating when cl 3 might be invoked.[305] Thus the words are to be read and construed on the basis that the Parent must continue to perform obligations and discharge liabilities until:
(i)the termination of the Subcontract by the effluxion of time; or
(ii)otherwise.[306]
[302] Appellant's submissions par 113.
[303] Appeal ts 25.
[304] Appellant's submissions par 108.
[305] Appellant's submissions par 109.
[306] Appellant's submissions pars 110 - 111; appeal ts 27.
Clause 3 must be construed as a whole. JKC invites a piecemeal approach to construing cl 3. It points to certain linguistic features of the first few lines of the clause as supporting its assertion that the clause is a risk allocation device. It then seeks to deal with the construction of the concluding words as if it were a separate exercise. Its approach to the construction of the concluding words is premised upon an acceptance of that characterisation of the purpose and effect of cl 3. But, at the risk of stating the obvious, the concluding words are part of the clause; the duration of the obligation created by cl 3, revealed by its concluding words, sheds light upon the character of that obligation.
JKC's construction tortures the language of the concluding words. It contends that the effect of the concluding words is that the obligation of the Parent comes to an end on the discharge of the contractual obligations or at some other time when the identified obligations have otherwise been discharged.[307] JKC appears to submit that all of this meaning is embedded in the word 'otherwise'.[308] No such meaning can be discerned; to the contrary, JKC's construction of the concluding words, set out in [265] above, is grammatical nonsense. It involves reading the relevant part of the clause to mean the Parent must 'continue to perform … obligations and discharge … liabilities … until … otherwise'. The intended meaning of the concluding words is plain: the Parent's obligation continues until, and only until, the Subcontract is terminated, regardless of the reasons for, or basis of, the termination.
[307] Appeal ts 29.
[308] Appeal ts 27 - 29.
I accept JKC's submission that, in their terms, the concluding words control the required duration of performance rather than designating when cl 3 might be invoked. However, the maximum duration of the Parent's obligation, as delimited by the concluding words, reveals an objective intention to limit the period in which cl 3 is available to be activated. To permit cl 3 to be engaged after the termination of the Subcontract would make no sense; cl 3 expressly provides for an end point of the Parent's obligations, but in such circumstances that end point could not apply.
Contrary to JKC's submission, my preferred construction does not denude cl 3 of utility. On my construction, cl 3 operates in the manner explained in [245] above during the period the Subcontract is on foot. The fact that its potential operation ends when the Subcontract is terminated conforms with and reflects its evident purpose and effect as outlined at [260] above. The nature of the obligation created by cl 3 - to step in and actually perform obligations and discharge liabilities of the Subcontractor - is consonant with the potential duration of that obligation - until the Subcontract comes to an end.
For these reasons, in my view, the concluding words of cl 3 are a powerful reason for adopting my preferred construction in preference to the construction advanced by JKC.
Contrary to JKC's submission,[309] that does not mean that a mere assertion of termination by one party is sufficient to bring the operation of the clause to an end. Nothing in the Subcontract alters the general law position that an assertion of termination is not self‑fulfilling. If one party wrongly asserts a right to terminate, thereby repudiating the contract, the contract remains on foot unless and until the other party accepts the repudiation.[310] In any event, this argument, based on the consequences of a construction, cannot overcome the textual and other considerations to which I have already referred.

Other submissions of JKC

[309] Appeal ts 25 - 26, 80.

[310] See, for example, Foran v Wight [1989] HCA 51; (1989) 168 CLR 385, 395 - 396, 441.

JKC's assertion of functional equivalence between the Bank Guarantees and the Parent Company Guarantees does not assist it. The task of the court is to construe the Parent Company Guarantees, not the Subcontract. In any event, as explained in the joint reasons at [141] ‑ [142] and [172] ‑ [174], there are numerous and significant textual and contextual differences between the provisions of the Subcontract concerning the Parent Company Guarantees and the Bank Guarantees, and between the form of the Bank Guarantees and of the Parent Company Guarantees. I also adopt what is said in the joint reasons at [176] ‑ [179] concerning cl 35.4 of the Subcontract and its limited significance for present purposes.
As observed in the joint reasons, many of JKC's submissions assume or merely assert the purpose of cl 3 as a risk allocation device by a provisional remedy in its favour.
An example of such a submission is JKC's assertion that a construction contrary to the one it advances has unusual commercial consequences unlikely to have been objectively intended by the parties. JKC's argument in that regard is substantially founded upon acceptance of its assertion of the purpose of cl 3. To my mind, consideration of the commercial consequences of JKC's construction, while not a matter of great weight, tends to point against its acceptance. On JKC's construction, subject to the formation by it of a reasonable opinion, by notice under cl 3, JKC could require the Parents to become liable to pay, on a provisional basis, an amount potentially equal to or exceeding the entirety of the contract sum.[311] That seems to me an unlikely intention to attribute to the parties.

The payment point

[311] Appeal ts 40 - 41.

As foreshadowed, on balance, I prefer a construction of cl 3 by which it does not encompass obligations to pay money. I agree with Buss P and Vaughan JA's reasons at [214] ‑ [227] for so concluding. However, as already noted, adoption of my preferred construction outlined at [245] above does not depend upon the resolution of the payment point.

The cl 9.2 point

The same is true of the question as to whether cl 3 is subject to cl 9.2. For the reasons set out in the joint reasons at [188] ‑ [197], I think that the paramountcy inherent in the opening words of cl 9.2 - '[n]otwithstanding anything to the contrary above' - must be given effect. However, a contrary conclusion on the cl 9.2 point would not affect my adoption of the construction outlined at [245] above in preference to JKC's construction.

Conclusion

For the above reasons, I do not accept JKC's construction of cl 3 - that it provides a provisional remedy, conditioned by the formation of a reasonable opinion by JKC, that enables JKC to have recourse against the Parent with respect to instances of a failure to perform by the Subcontractor, such remedy being available to JKC even after the Subcontract has been terminated or asserted to have been terminated. In my opinion, considerations of text, context, purpose and coherence indicate that cl 3 is of a fundamentally different character - it empowers JKC to require the Parent to step in and become primarily liable to perform obligations or discharge liabilities which, in JKC's reasonable opinion, the Subcontractor has failed to perform or discharge, thereby providing JKC with an alternative means of obtaining the due performance of the Subcontractor's obligations (and discharge of its liabilities).
Consequently, each ground of appeal fails. I would dismiss the appeal. It is not necessary to deal with the notice of contention, which should therefore also be dismissed.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.

OE
Research Orderly to the Hon Justice Vaughan

22 JULY 2020

JURISDICTION     :   SUPREME COURT OF WESTERN AUSTRALIA
TITLE OF COURT :   THE COURT OF APPEAL (WA)
CITATION: JKC AUSTRALIA LNG PTY LTD -v- CH2M HILL COMPANIES LTD [No 2] [2020] WASCA 112 (S)
CORAM:   BUSS P
BEECH JA
VAUGHAN JA

HEARD:   22 JULY 2020
DELIVERED          :   22 JULY 2020
FILE NO/S:   CACV 70 of 2019
BETWEEN:   JKC AUSTRALIA LNG PTY LTD
Appellant
AND
CH2M HILL COMPANIES LTD
First Respondent
UGL PTY LIMITED (FORMERLY KNOWN AS UGL LIMITED)
Second Respondent
GENERAL ELECTRIC COMPANY
Third Respondent

ON APPEAL FROM:
Jurisdiction              :   SUPREME COURT OF WESTERN AUSTRALIA
Coram:   QUINLAN CJ
File Number            :   CIV 2584 of 2018

Catchwords:

Costs - indemnity costs - Special costs order - Turns on own facts

Legislation:

Legal Profession Act 2008 (WA), s 280
Legal Practitioners (Supreme Court) (Contentious Business) Determination 2018 (WA)

Result:

Indemnity costs order refused
Limited special costs order made

Category: B

Representation:

Counsel:

Appellant	:	Dr R Collins
First Respondent	:	Ms P Thiagarajan
Second Respondent	:	Ms P Thiagarajan
Third Respondent	:	Ms P Thiagarajan

Solicitors:

Appellant	:	Clyde & Co (Perth Office)
First Respondent	:	Corrs Chambers Westgarth
Second Respondent	:	Corrs Chambers Westgarth
Third Respondent	:	Corrs Chambers Westgarth

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

JKC Australia LNG Pty Ltd v CH2M Hill Companies Ltd (No 2) [2020] WASCA 112
Sino Iron Pty Ltd v Mineralogy Pty Ltd (No 2) [2017] WASCA 76 (S)

JUDGMENT OF THE COURT:

(These reasons were delivered extemporaneously and have been edited from the transcript.)

On 22 July 2020, we delivered judgment in JKC Australia LNG Pty Ltd v CH2M Hill Companies Ltd (No 2).[312]
[312] JKC Australia LNG Pty Ltd v CH2M Hill Companies Ltd (No 2) [2020] WASCA 112.
The appellant relied on 3 grounds of appeal. Each ground failed. The respondents relied on a notice of contention. It was unnecessary, in view of the failure of all of the grounds of appeal, to determine the merits of the notice of contention. We decided that the appeal should be dismissed.
The parties are agreed that this court should make orders that the appeal be dismissed and the notice of contention be dismissed.
The parties are in dispute, however, as to the appropriate costs orders.
The successful respondents seek costs on an indemnity basis; alternatively, a special order, pursuant to s 280 of the Legal Profession Act 2008 (WA) (the Act), that:
(a)the relevant limits imposed by scale items 24(b) and (d) - (l) and 33 in the Legal Practitioners (Supreme Court) (Contentious Business) Determination 2018 (WA) (2018 Scale) be removed; and
(b)the maximum hourly and daily rates for solicitors and counsel provided for in clause 12 of the 2018 Scale be increased by 50%.
The unsuccessful appellant accepts that it must pay the respondents' costs of the appeal. However, the appellant seeks its costs of an adjournment application made unsuccessfully by the respondents a few days before the hearing of the appeal.
The respondents submitted that costs should be ordered on an indemnity basis because the appellant's case was hopeless, the appellant had shifted its position during the appeal and no properly advised litigant would have pursued the appeal. In our opinion, the appellant has not established that no properly advised litigant would have pursued the appeal. The high threshold for awarding costs on an indemnity basis has not been made out. No order for indemnity costs should be made.
The principles governing an application for a special costs order to the effect that the costs of a party to an appeal or an application before this court should be taxed without reference to some or all of the limits provided for in the 2018 Scale are set out in Sino Iron Pty Ltd v Mineralogy Pty Ltd (No 2).[313] It is unnecessary to repeat them.
[313] Sino Iron Pty Ltd v Mineralogy Pty Ltd (No 2) [2017] WASCA 76 (S).
The respondents have filed and served an affidavit of a solicitor, Spencer Edward Flay, sworn 21 July 2020 which sets out the amount which the respondents would wish to claim on taxation in respect of relevant items of the scale, if they were not constrained by the limits imposed in the 2018 Scale. Those amounts substantially exceed the limits applicable under the 2018 Scale.

We are satisfied, having regard to the financial significance and the complexity and importance to the parties of the issues argued in the appeal that there is a fairly arguable case that the bill to be presented in relation to the fees of Mr J Gleeson QC may tax at an amount which is greater than the limits applicable under the relevant costs determination, and that the amount allowable under the relevant costs determination is to that extent inadequate, in accordance with s 280 of the Act. We are not so satisfied in relation to the other fees and costs incurred by the respondents. The points agitated in the appeal were largely a re-run of the points agitated at the trial. All issues raised by the grounds of appeal were concerned with the proper construction of a single instrument, namely the Parent Company Guarantee read in the context of the Subcontract.
We consider that the amount of costs allowable under the relevant costs determination is inadequate in relation to some of the fees of Mr J Gleeson QC because of the complexity and importance to the parties of the issues of construction litigated in the appeal. We would not grant the respondents the other relief they seek in relation to the scale. As we have mentioned, the points agitated in the appeal were largely a re-run of the points agitated at the trial and all issues raised by the grounds of appeal were concerned with the proper construction of a single instrument. We consider that justice would be done as between the parties, in the context of the statutory scheme, if:
(a)the relevant limits imposed by scale item 24(h) were removed in relation to the fees of Mr J Gleeson QC; and
(b)the maximum hourly and daily rates for Mr J Gleeson QC provided for in clause 12 of the scale be increased by 50%.
There will be a special order as to costs to that extent.
There should be no order as to the costs of the adjournment application. The respondents brought the application and it was refused. However, it was not an unreasonable application given the unique circumstances presented by COVID-19. The appellant did not seek costs when orders were made dismissing the application. That was the time to seek the costs. In the circumstances, the question should not be re-agitated now.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.

JM
Research Associate to the Honourable Justice Buss

24 JULY 2020