JKC Australia LNG Pty Ltd v CH2M Hill Companies Ltd [No 2]

JKC Australia LNG Pty Ltd was the appellant and CH2M Hill Companies Ltd was the respondent in this case before the Full Court of the Federal Court of Australia. The dispute arose from the interpretation of parent company guarantees provided by the respondents in relation to the performance of a subcontractor's obligations under a subcontract with the appellant. The primary issue before the court was whether the parent company guarantees required the respondents to assume "pay now, argue later" liability upon forming a reasonable opinion that the subcontractor had failed to meet their obligations under the subcontract. The court also had to determine whether clause 3 of the parent company guarantees provided a provisional remedy, if it evinced a purpose of risk allocation not subject to any defence, set-off or counterclaim by the respondents, if it covered payment obligations, and whether the respondents' obligations under clause 3 ceased upon termination of the subcontract.

The court found that the purpose and object of the contractual provisions could be ascertained by considering the contractual provisions read as a whole and by understanding the surrounding circumstances. The court held that the purpose or object of contractual provisions is revealed by their text and structure and 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. The court also held that the primary judge's approach to interpreting the parent company guarantees was incorrect, as the primary judge had adopted a narrow and pedantic approach to construction. The court held that a contract should be construed practically so as to give better effect to its commercial purpose, and the law seeks to uphold commercial contractual obligations and the expectations that derive from them.

The court found that the parent company guarantees did not require the respondents to meet "pay now, argue later" liability upon forming a reasonable opinion that the subcontractor had failed to meet their obligations under the subcontract. The court also found that clause 3 of the parent company guarantees did not provide a provisional remedy, did not evince a purpose of risk allocation not subject to any defence, set-off or counterclaim by the respondents, and did not cover payment obligations. Finally, the court held that the respondents' obligations under clause 3 ceased upon termination of the subcontract.

The court allowed the appeal, set aside the primary judge's decision, and remitted the matter to the primary judge for further consideration in light of the court's reasons. The court also ordered that the appellant pay the respondents' costs of the appeal.