Kvaerner Process Systems Pty Ltd v Australian Gasfields Ltd

[2001] WASC 155

KVAERNER PROCESS SYSTEMS PTY LTD -v- AUSTRALIAN GASFIELDS LTD [2001] WASC 155

Jurisdiction:	SUPREME COURT OF WESTERN AUSTRALIA	Citation No:	[2001] WASC 155
Case No:	CIV:1131/2001	Heard:	14 MARCH 2001
Coram:	PARKER J	Delivered:	20/06/01
No of pages:	23	Judgment Part:	1 of 1
Result:	Interlocutory injunction granted
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Parties:	KVAERNER PROCESS SYSTEMS PTY LTD (ACN 005 500 890) AUSTRALIAN GASFIELDS LTD (ACN 009 330 134)
Catchwords:	Contracts Building, Engineering and Related Contracts Security by way of unconditional Bank Undertaking to Pay Dispute as to underlying contract Whether beneficiary entitled to draw on security Proper interpretation of underlying contract
Legislation:	Nil
Case References:	Bachmann Pty Ltd v BHP Power New Zealand Ltd [1999] 1 VR 420 Barclay Mowlem Construction Ltd v Simon Engineering (Australia) Pty Ltd (1991) 23 NSWLR 451 Bateman Project Engineering Pty Ltd & Ors v Resolute Ltd & Ors [2000] WASC 284 Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812 Hortico (Australia) Pty Ltd v Energy Equipment Co (Australia) Pty Ltd (1985) 1 NSWLR 545 J H Evans (NT) Pty Ltd v Diano Nominees Pty Ltd [1989] NTSC 4 Pearson Bridge (NSW) Pty Ltd v The State Rail Authority of New South Wales (1982) 1 ACLR 81 Reed Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd (1999) 15 BCL 158 Roehampton Developments Pty Ltd (in liq) v FAI General Insurance Co Ltd [2000] WASC 235 Selvas Pty Ltd v Hansen & Yuncken (SA) Pty Ltd & Anor (1987) 6 ACLR 36 Wood Hall Ltd v The Pipeline Authority (1979) 141 CLR 443 Anaconda Operations Pty Ltd & Ors v Fluor Daniel Pty Ltd [1999] VSCA 214 Olex Focas Pty Ltd & Anor v Skodaexport Co Ltd & Anor (1996) 134 FLR 331

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA CITATION : KVAERNER PROCESS SYSTEMS PTY LTD -v- AUSTRALIAN GASFIELDS LTD [2001] WASC 155 CORAM : PARKER J HEARD : 14 MARCH 2001 DELIVERED : 20 JUNE 2001 FILE NO/S : CIV 1131 of 2001 BETWEEN : KVAERNER PROCESS SYSTEMS PTY LTD (ACN 005 500 890)

Plaintiff

AND

AUSTRALIAN GASFIELDS LTD (ACN 009 330 134)
Defendant

Catchwords:

Contracts - Building, Engineering and Related Contracts - Security by way of unconditional Bank Undertaking to Pay - Dispute as to underlying contract - Whether beneficiary entitled to draw on security - Proper interpretation of underlying contract

Legislation:

Nil

Result:

Interlocutory injunction granted

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Representation:

Counsel:

Plaintiff : Mr P G Clifford
Defendant : Mr P F Riethmuller

Solicitors:

Plaintiff : Gadens
Defendant : Freehills

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

Bachmann Pty Ltd v BHP Power New Zealand Ltd [1999] 1 VR 420
Barclay Mowlem Construction Ltd v Simon Engineering (Australia) Pty Ltd (1991) 23 NSWLR 451
Bateman Project Engineering Pty Ltd & Ors v Resolute Ltd & Ors [2000] WASC 284
Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812
Hortico (Australia) Pty Ltd v Energy Equipment Co (Australia) Pty Ltd (1985) 1 NSWLR 545
J H Evans (NT) Pty Ltd v Diano Nominees Pty Ltd [1989] NTSC 4
Pearson Bridge (NSW) Pty Ltd v The State Rail Authority of New South Wales (1982) 1 ACLR 81
Reed Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd (1999) 15 BCL 158
Roehampton Developments Pty Ltd (in liq) v FAI General Insurance Co Ltd [2000] WASC 235
Selvas Pty Ltd v Hansen & Yuncken (SA) Pty Ltd & Anor (1987) 6 ACLR 36
Wood Hall Ltd v The Pipeline Authority (1979) 141 CLR 443

Case(s) also cited:

Anaconda Operations Pty Ltd & Ors v Fluor Daniel Pty Ltd [1999] VSCA 214
Olex Focas Pty Ltd & Anor v Skodaexport Co Ltd & Anor (1996) 134 FLR 331

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1 PARKER J: By a writ filed on 2 February 2001 the plaintiff seeks declarations that two demands for payment by the defendant on the Den Norske Bank ASA, Singapore Branch, of the sum of Australian $998,762 under a Banker's Undertaking are made in breach of a contract between the plaintiff and the defendant and in breach of provisions of the Trade Practices Act 1974 (Cth). An injunction is also sought inter alia to restrain the defendant from receiving payment of the $998,762 from the Bank and requiring the defendant to revoke or withdraw the demands for payment it had made on the Bank.

2 By subsequent amendment of the endorsement of claim the plaintiff also claims the sum of $943,718 as a debt due to it by the defendant pursuant to the contract, or, alternatively, as damages pursuant to the Trade Practices Act, together with interest.

3 On 2 February 2001 Scott J granted an interim interlocutory injunction restraining the defendant from pursuing the demands on the Bank for payment and from making any further demand on the Banker's Undertaking and directing the defendant to revoke or withdraw the demands that it had made. That interim injunction has been continued in force by order of Miller J made on 16 February 2001 pending a full hearing on the merits of the plaintiff's application for an interlocutory injunction pending the trial of the action.

4 This decision is in respect of that full hearing of the plaintiff's application for an interlocutory injunction.

5 By a written agreement between the plaintiff and the defendant dated 15 July 1998 ("the contract") the plaintiff agreed to carry out and complete the design, supply, construction and commissioning of a gas processing plant, well head facilities and a metering station ("the Works") for the defendant's Eromanga Gas Pipeline Project in Queensland for a contract price of $9,987,616. The plaintiff's obligation was to design and construct the works so as to meet requirements that had been specified by the defendant. The design and construction undertaken pursuant to the contract was in respect of the processing plant, the wellhead facilities and the metering station but did not extend to the gas field or to the delivery of gas (in whatever form) from the wellhead facilities, which were at more than one location, to the processing plant. In this respect the plaintiff's contractual responsibility in respect of the processing plant commenced at the intake point of that plant. This has become a matter of some materiality to aspects of the underlying dispute between the parties as it is a contention of the plaintiff that the design and layout of the pipelines and

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associated equipment which connect the wellheads to the processing plant is responsible for what the defendant claims to be defects in the design of the processing plant and deficiencies in its performance.

6 Apart from the dispute between the parties as to the competence of the design and the performance of the processing plant there are a number of other significant areas of dispute between the parties arising out of the contract. It is the plaintiff's contention that practical completion was achieved on 31 August 1999 and that a certificate of practical completion should have been issued at that time by virtue of which it would be entitled to the payment of a further $998,761 (plus adjustments for approved variations). The defendant denies that practical completion was so achieved and no certificate of practical completion has been issued to the present time. There is also in dispute the question whether there was delay by the plaintiff so as to enliven a liquidated damages provision in the contract pursuant to which the defendant claims $900,000 by way of liquidated damages. It is the plaintiff's contention that if its claims for extensions of time were properly considered there would be no delay and no liquidated damages would be payable. The contract provided for the appointment of an Engineer by the defendant with responsibility inter alia for the issue of certificates of practical completion and the assessment of claims for extensions of time. No Engineer has ever been appointed with the consequence, in accordance with the contract, that the role of Engineer has been performed by the defendant itself. In these reasons I will at times refer to the defendant as a matter of expediency where, by the contract, the Engineer was to act. There are also significant disputes between the parties as to alleged defects and rectification work and as to unliquidated damages which the defendant claims are its entitlement by virtue of failures of the plaintiff to fulfil its contractual obligations.

7 It is common ground that from 31 August 1999 the gas processing plant has produced marketable gas which has been sold by the defendant to a purchaser ("Pasminco") pursuant to an agreement which pre-dated the contract in issue in these proceedings and which was in the contemplation of the plaintiff and the defendant when the contract was entered into. It is the defendant's case, however, that production from the processing plant has been unreliable so that there has been a great deal of lost production because of design deficiencies and defects due to the plaintiff's failure to meet its contractual obligations.

8 It is on this basis that before me the defendant contends that it presently claims from the plaintiff some $2,979,316, less it seems $166,000 for a defect which the plaintiff has now rectified, ie some

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$2,800,000. This figure includes $900,000 for liquidated damages and $1,226,880 being the cost of gas which the defendant says it has had to purchase from other sources to satisfy its ongoing contractual obligation to provide gas to Pasminco.

9 There is some difference in the evidence before me as to whether the defendant now holds slightly in excess of $1 million by way of moneys retained by it from moneys due to the plaintiff under the contract, or the sum of $943,718. The merits of this application do not require that I attempt to resolve that difference.

10 The plaintiff denies generally that it has failed to meet its contractual obligations and in particular denies that it is in truth liable to the defendant in the sum claimed. Acknowledging that there are some matters which involve genuine dispute between it and the defendant, and while it contends that in truth it has no liability to the defendant, it is the plaintiff's position that its potential liability to the defendant is at worst very much less than the retention moneys presently held by the defendant.

11 In addition to retention moneys the contract provided for the plaintiff to provide a security. This was to be provided either in cash or by way of a Banker's Undertaking. The contract provided for the form of the Banker's Undertaking. The security was to be 10 per cent of the contract price, ie $998,762. The plaintiff met this requirement by providing the Banker's Undertaking the subject of this application. This Banker's Undertaking is essentially in the terms contemplated by the contract.

12 It is against this background that the defendant says that it has an entitlement to over $2.8 million to be paid to it by the plaintiff, whereas it holds only $943,718 by way of retention moneys. In these circumstances the defendant's case is that it is entitled to call on the Banker's Undertaking for its full amount and to apply the proceeds in part satisfaction of the claims it has against the plaintiff under the contract. The defendant presents its case on the basis that in due course its claims to over $2.8 million may be the subject of litigation or arbitration in which event, according to the outcome of any such proceedings, there may in the end be a need for the defendant to repay some or all of the proceeds of the Banker's Undertaking to the plaintiff.

13 Before the commencement of proceedings in this Court, and when the defendant first made demand on the Banker's Undertaking in October 2000, the plaintiff was granted an interlocutory injunction in the High Court of Singapore restraining the defendant from calling on the

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Undertaking. For jurisdictional reasons, and not by way of a determination on the merits, that injunction has since been discharged and the parties are now proceeding in this Court.

14 The contract provided that in the event of a dispute between the parties they should forthwith confer in an endeavour to settle the dispute and, failing agreement within 30 days, the dispute might be referred to arbitration, but only with the agreement of both parties. Attempts by the plaintiff to secure the agreement of the defendant to a reference to arbitration have been unsuccessful. As a consequence, the plaintiff has now, by amendment, expanded its claims in this action to include the underlying issues of dispute pursuant to the contract.

15 The relevant terms of the contract are sparse indeed for present purposes. The contract is actually composed of a number of written documents including a short written agreement to which there are attached schedules, special conditions of contract and general conditions of contract. In addition there were extensively detailed specifications and an appendix which made provisions in respect of an environmental management plan.

16 It is the general conditions of contract which contain the relevant provisions. GC7.0 provides as follows:

"7.0 SECURITY AND RETENTION MONEYS

7.1 Amount of security

No later than 10 days after the Date of Award or on execution of the Agreement, whichever is earlier, the Contractor shall lodge with the Company a security equal to 10% of the Contract Price.

7.2 Form of security


The Contractor may provide the security in cash or by way of a banker's undertaking given by a bank acceptable to the Company in the form contained in Appendix A on which any applicable stamp duty has been paid. If the security is provided in cash it must be placed in a bank account in the name of the Company to be operated on only in accordance with the terms of the Contract. Interest, if any, accruing on the deposit will be made

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available to the Contractor as it is paid or credited by the bank.

7.3 Company to hold

The security shall be held by the Company and must continue in force until the date on which the Engineer issues a Certificate of Final Completion pursuant to clause 43. Within 30 days thereafter the Company shall, if the security is provided in cash, return the security to the Contractor less any withholdings and deductions which the Company is entitled to make. If the security is not provided in cash the Company shall return the banker's undertaking to the Contractor unless the Company has enforced or intends to enforce the same.

7.4 Failure by Contractor to supply security

If the security is not lodged within the time specified in clause 7.1 the Company may, in its discretion, treat the breach as a minor default under clause 49 or a major default under clause 50.

7.5 Retention moneys

The Company may retain moneys from payments due from time to time to the Contractor in accordance with clause 45.

7.6 Substitution for retention money

Subject to the Company being reasonably satisfied that it will not otherwise be disadvantaged, the Contractor may in lieu of the Company retaining moneys from payments pursuant to clause 45, provide the Company with one or more further bankers undertakings in the form permitted in Clause 7.2 for amounts aggregating to the moneys which would otherwise be retained by the Company. To the extent that such security is provided, the Company shall not deduct retention moneys."

17 Security was lodged by the contractor in the form of the Banker's Undertaking pursuant GC7.2. There has been no provision of security in substitution for retention money as contemplated by GC7.6.
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18 It is to be noted from GC7.2 that a Banker's Undertaking was required to be in the form stipulated in an appendix to the contract. Further, if a cash security was provided it was to be placed in a bank account in the name of the defendant but that account could only be operated on "in accordance with the terms of the contract". Although the account was to be in the name of the defendant the interest on the amount deposited was to be "made available" to the contractor as it was paid or credited by the bank.

19 By GC7.3 the security must be continued in force until the Engineer issues a certificate of final completion. This certificate is distinct from a certificate of practical completion. By GC43.0 the certificate of final completion is only to issue on the expiration of the last of the periods of guarantee and defect remedy provided by the contract and only when the Engineer is satisfied that the whole of the Works have been completed in accordance with the contract.

20 It is also to be noted from GC7.3 that while a cash security is to be returned within 30 days of the issue of certificate of final completion, a Banker's Undertaking is not required to be returned to the plaintiff if the defendant "has enforced or intends to enforce" the undertaking. Notwithstanding a submission for the defendant to the contrary, it is the apparent practical effect of this provision that there is no prospect that a certificate of final completion would be issued by the defendant before the resolution of the matters now in dispute between the parties. In the course of that resolution in this action appropriate orders may be made in respect of the enforcement or non-enforcement of the Banker's Undertaking which, by the terms of GC7.3 and its own terms, may be "enforced" by the defendant in appropriate circumstances after the issue of the certificate of final completion.

21 It is to be noted that GC7.0 contains no express statement of the purpose of the security or of the circumstances in which the defendant might call on it in the language of GC7.3 "enforce" it. Nevertheless, it is the apparent intention and effect of GC7.0 that a security by way of a Banker's Undertaking should be as available to the defendant as a cash security save that a Banker's Undertaking might be enforced after the issue of a certificate of final completion as indicated earlier.

22 Both the actual Banker's Undertaking, and the form of it prescribed in the contract, make it abundantly clear that the undertaking is to pay on demand made in writing by the defendant, from time to time, until the defendant by notice in writing releases the bank from its obligations under

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the Undertaking. The Undertaking is to pay "a sum or sums not exceeding" $980,762 in the aggregate. Expressly the Bank undertook to make payment to the defendant without any reference to the plaintiff and irrespective of any notice to the Bank by the contractor and irrespective of the performance or non-performance by either the plaintiff or the defendant of the contract or any variation of it. There can be no doubt that it was the intention of the parties to the contract that, as between the bank and the defendant, the Undertaking should be unconditional.

23 It is to be noted that the Bank is not a party to these proceedings and there is no issue as to the Bank's liability to honour its Undertaking on due demand or of the defendant's right, as between it and the Bank, to call on the Undertaking. The focus of this application and, relevantly, the action in which it is founded, is the distinct issue of the right of the defendant, as between the plaintiff and the defendant, to call on the Undertaking.

24 In this case a written demand was made by the defendant originally on 11 October 2000. It was a demand for payment of the full amount of the Undertaking. Although strictly not required by the terms of the contract or of the Undertaking, the defendant stipulated the reason for the demand in the following terms:

" … to cover the cost to the company of rectification work and other essential warranty work not performed by the contractor … as per contract …."

It required the amount of the demand to be remitted to an account in Australia of Energy Equity Corporation Ltd, the parent company of the defendant.

25 It is not the defendant's case before me that it is entitled pursuant to the contract to call on or enforce the Banker's Undertaking at any time it chooses during the contract. Rather, the defendant puts its case on the basis that the contract has the effect that, notwithstanding dispute between the parties to the contract as to the entitlement of either party to be paid sums of money pursuant to the contract, and pending the outcome of the resolution of such disputes, the defendant is entitled to call on the Undertaking "to reimburse or compensate the defendant for costs, losses and damages it has suffered as a result of defects in the Plant" which the defendant "maintains" are the plaintiff's responsibility. It is the defendant's case, as I understand it, that this is the position as agreed by the parties under the contract and that the entitlement of the defendant to call on the Undertaking arises whenever it has bona fide claims to be paid money by the plaintiff (notwithstanding dispute) which claims exceed the

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retention moneys it holds. This, it is submitted, is a contractually pre-determined allocation of financial risk pending resolution of any dispute as to the defendant's entitlement. In this case, the defendant says that it has bona fide claims to some $2.8 million which well exceed the total of the retention moneys it holds and the amount of the security provided by the Banker's Undertaking so that it has an entitlement to call on the Undertaking in full.

26 It is the defendant's case that its entitlement extends to, and its reason for calling on the Undertaking is for, its reimbursement or compensation for its claimed costs, losses and damages including liquidated damages pursuant to the contract. That is, that it is now entitled to apply the full cash value of the Undertaking to its own purposes pending resolution of the contractual dispute.

27 The plaintiff disputes that the defendant has any entitlement to call on the Undertaking in the present circumstances in the absence of an entitlement to be paid costs, losses or damages which are the subject of agreement or judicial or arbitral determination. It also disputes that the defendant has any bona fide claim on it to be paid moneys exceeding the present retention moneys.

28 While many aspects of the contract can be expected to be the subject of extensive dispute on the trial of this action and cannot be satisfactorily finally determined by me on this interlocutory application, I will proceed on the tentative basis that, relevantly, the apparent intention and effect of the contract is that a security provided by way of a Banker's Undertaking should, if converted into cash by the defendant, stand in all respects as a cash security and be subject to the same contractual limitations as to its use by the defendant as apply to a cash security. Accordingly, it may be dealt with by the defendant "only in accordance with the terms of the Contract", GC7.2, and from it the defendant may only withhold or deduct sums according to the entitlement of the defendant to do so pursuant to the contract, GC7.3.

29 There are express provisions of the contract dealing with the withholding of moneys but these have no present relevance. The parties agree that the only provision relevant to the present circumstances dealing with deductions is GC47.0 which provides:

"47.0 DEDUCTIONS FROM PAYMENTS

The Company may deduct from any money due or becoming due to the Contractor pursuant to clause 45 or

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from the security provided by the Contractor pursuant to clause 7 or otherwise:

(a) amounts equal to all debts and moneys due from the Contractor or its Sub-contractors to the Company under or by virtue of the Contract, and

(b) amounts equal to all costs, charges, damages, liquidated sums and expenses which the Company has paid or incurred and which or for which the Contractor or its Sub-contractors is or are liable to bear, pay or make reimbursement to the Company."

30 For the purposes of this application I proceed on the tentative view that GC47.0, read with GC7.2 and GC7.3, is intended to have the effect of defining exhaustively the defendant's entitlement to have recourse to the security and to the deductions which the defendant is authorised to make from money due or becoming due to the plaintiff or from the security provided by the Banker's Undertaking. Notwithstanding that GC47.0 is expressed in terms of an authority to deduct, it presently appears to me that its intended effect is to preclude deduction by the defendant in other circumstances. I should make it clear that these observations are not intended to exclude deductions authorised by other provisions of the contract which apply to situations that have no application to the present circumstances.

31 The plaintiff seeks to rely on a line of decisions which may be conveniently regarded as commencing with Pearson Bridge (NSW) Pty Ltd v The State Rail Authority of New South Wales (1982) 1 ACLR 81 which have generally taken the view that, as between the parties to the underlying contract, one party may be restrained from calling on a security in circumstances where the underlying contract imposes conditions on the right to do this, even though the security itself is unconditional, and where there is an arguable case that the condition giving rise to the entitlement has not been satisfied. Other cases relied on in this context, which followed Pearson Bridge, include Selvas Pty Ltd v Hansen & Yuncken (SA) Pty Ltd & Anor (1987) 6 ACLR 36, Barclay Mowlem Construction Ltd v Simon Engineering (Australia) Pty Ltd (1991) 23 NSWLR 451, J H Evans (NT) Pty Ltd v Diano Nominees Pty Ltd [1989] NTSC 4 and Reed Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd (1999) 15 BCL 158.

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32 The defendant relies on what the parties regard as a conflicting line of decisions. These have as their primary focus the unconditional nature of the Banker's Undertaking or other security, as expressly contemplated by the underlying contract between the parties, and the undesirability of restraining the holder of an unconditional security from exercising its rights according to its terms, as to do so would deprive such securities of the unconditional quality which gives them much of their commercial currency. This line of cases tends to draw on the decision in Wood Hall Ltd v The Pipeline Authority (1979) 141 CLR 443, and in particular observations of Stephen J at 457-58, to emphasise this aspect. Decisions in particular of the Victorian Court of Appeal have placed great emphasis on this aspect of the issue. In particular, I would refer to Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812 and Bachmann Pty Ltd v BHP Power New Zealand Ltd [1999] 1 VR 420. These cases have drawn attention to reservations expressed about the reasoning in the Pearson Bridge line of decisions, cf Hudson on Building and Engineering Contracts, 11th ed, at 17,075. This line of decisions has stood against restraining the holder of an unconditional security from exercising it, at least where the holder of the security has a bonafide claim to be entitled to do so.

33 There have been attempts to resolve the difference of emphasis and approach revealed by these two lines of authority and before me in particular the parties relied on the analysis of them attempted by Owen J in Bateman Project Engineering Pty Ltd & Ors v Resolute Ltd & Ors [2000] WASC 284. Much attention was given in the course of submissions to comparing and contrasting the circumstances of this case with those considered by Owen J in the Bateman Project case. I am grateful for the analysis of the authorities made by Owen J but it seems to me that the terms of the underlying contract in this case are so materially different from those being considered by Owen J that the decision itself is of no direct application. I have been similarly assisted by the analysis attempted by Hasluck J in Roehampton Developments Pty Ltd (in liq) v FAI General Insurance Co Ltd [2000] WASC 235.

34 These and other cases serve to emphasise, however, the materiality of the precise terms of the underlying contract which inevitably differ, often significantly, from decision to decision, except where standard form contracts are being considered. The present case involves anything but a standard form contract.

35 If it be correct, as I tentatively think is the case, that on its proper construction GC47.0, read with GC7.0, is intended to provide a

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contractual limitation or condition on the circumstances in which the defendant is entitled, as between itself and the plaintiff, to have recourse to the Banker's Undertaking, it becomes necessary to consider the terms of GC47.0 which are set out earlier in these reasons. This clause is less than clear as to its intended meaning.

36 Paragraph (a) refers to debts and moneys due from the plaintiff and par (b) refers to costs, charges, damages, liquidated sums and expenses which the defendant has "paid or incurred" and for which the plaintiff is "liable". Terms such as debts and moneys due, and costs etc for which the plaintiff is liable, provide no clear indication whether they are intended to be satisfied merely by the existence of a bona fide, though disputed, claim to such moneys by the defendant, or, whether they refer only to such moneys where the parties agree that they are due or that the contractor is liable, or where there has been a determination of those issues between the parties in judicial or arbitral proceedings.

37 Turning to elements of par (b), liquidated sums appears to be a reference to sums of money which fall to be paid under other specific provisions of the contract, often on the certificate of the Engineer. Damages would include liquidated damages. In the case of unliquidated damages, the defendant's submission is that in accordance with this provision it may make its own determination of liability and assess its "damages" and, despite dispute, deduct the measure of "damages" which it has determined so long as in these things it acts bona fide. That is not an interpretation strongly supported by the words used. Support for this must be gleaned from the commercial context.

38 There are a few provisions in the general conditions of contract which expressly provide that in certain circumstances moneys shall be a debt due by the plaintiff to the defendant, although in GC50.3(e), for example, an Engineer's certificate would be relevant to the determination of the amount of such a debt. GC49.2 expressly authorises the deduction by the defendant of "a sum equal to the amount the company in its discretion decides is adequate to compensate it" for a "minor default" which the contractor has failed to remedy. This provision is more clear in its intended operation and serves to emphasise the uncertainty of GC47.0. In the case of the costing of variations, where there is disagreement as to their value, GC34.3(d) provides that the costs shall be referred to an independent expert whose decision shall be final and binding. This provides a simple and quick means by which, during the progress of the contract works, some disputed issues can become the subject of a binding decision. By GC42.0 the Engineer is to set out in the certificate of

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practical completion all matters, omission and defects which the contractor is to make good. The value of these, as stated by the Engineer in the certificate, is not to be included in the amount payable under the certificate. By this means there is a clear money value determined for the purposes of the contract of an amount that might be deducted or withheld by the defendant from moneys otherwise due or becoming due to the plaintiff.

39 These and other particular provisions provide some indication as to how some disputes or uncertainty as to indebtedness or liability of the plaintiff to the defendant are to be determined at least pro tem for the purposes of the contract, so as to make more clear the entitlement of the defendant to resort to GC47.0. These possibilities, however, do not satisfactorily answer all the issues concerning GC47.0.

40 Standing back a little from the precise terms of the contract there is some force in the notion that GC47.0 appears to be in the nature of a self-help remedy, as to which I note the observations in particular of Charles JA in Fletcher Constructions at 822 and of Brooking JA in Bachmann Pty Ltd at 436-7. It would significantly limit the practical operation of GC47.0 if it were only available in situations where there was no dispute that moneys were due or that the plaintiff was liable to pay.

41 The intended operation of provisions serving the purpose which GC47.0 serves in this contract have often been the subject of litigation and the decisions are testament to the difficulty which they often present because of the uncertainty which attends many of them. What is intended is very often to be gleaned from, or confirmed by, other provisions in the contract under consideration. That was the case in the Bateman Project decision (supra) and in a number of the other decisions to which reference has been made in these reasons. There is no provision in this contract on which either party relies for this purpose. I note, however, GC52.1 which deals with the plaintiff's options in the case of default by the defendant or the Engineer. It provides that if the defendant neglects or refuses to make payment which is due to the contractor and in respect of which "the company is not entitled, whether under the contract or otherwise, to suspend or withhold payment or to set off any moneys owing or payable to it and in respect of which there is no bona fide dispute as to the company's liability to make the same …", the contractor might cease all operations or terminate the contract if the neglect or refusal to pay is not remedied within 30 days after notice to the defendant. The same provision applies if the Engineer neglects or refuses to issue a certificate to which the contractor is entitled. This provision provides an indication

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that the parties contemplated that they would continue to be bound to perform their respective obligations in circumstances where there was a bona fide dispute as to whether or not the company was entitled to neglect or refuse to make payments of moneys otherwise due to the plaintiff under the contract.

42 Given the general nature of the contract, the unqualified terms of the Banker's Undertaking which it contemplated, the terms of GC47.0, and the other matters noted, I would take the tentative view for the purposes of this application that the defendant is entitled to make a deduction in accordance with GC47.0 where it has a bona fide claim to be entitled to make that deduction, notwithstanding that its claim is disputed by the plaintiff.

43 In Fletcher Constructions Australia Ltd v Varnsdorf Pty Ltd (supra) at 826-7 Callaway JA observed:

"There are broadly two reasons why the beneficiary may have stipulated for a guarantee. One is to provide security. If it has a valid claim and there are difficulties about recovering from the party in default, it has recourse against the bank. The second reason, which is additional to the first, is to allocate the risk as to who shall be out of pocket pending resolution of a dispute. The beneficiary is then able to call upon the guarantee even if it turns out, in the end, that the other party was not in default. Compare Burley Forest Estate Management Pty Ltd v Cigna Insurance Australia Ltd [1992] 2 Qd R 54 at 59 and Themehelp Ltd v West [1996] QB 84 in the dissenting judgment of Evan LJ at 103. It is a question of construction of the underlying contract whether the guarantee is provided solely by way of security or also as a risk allocation device. Remembering that we are speaking of guarantees in the sense of standby letters of credit, performance bonds, guarantees in lieu of retention moneys and the like, the latter purpose is often present and commercial practice plays a large part in construing the contract. No implication may be made that is inconsistent with an agreed allocation of risk as to who shall be out of pocket pending resolution of a dispute and clauses in the contract that do not expressly inhibit the beneficiary from calling upon the security should not be too readily construed to have that effect. As I have already indicated, they may simply refer to the kind of default which, if it is alleged in good faith, enables the beneficiary to have recourse to the security or its proceeds."

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The concluding observations in that passage are more obviously directed to underlying contracts of a different form and purpose from the present, but their sense may be readily adapted. It is my tentative view of the general conditions of contract that, in this respect, they contemplate that the security is not merely by way of an ultimate security for payment but also to provide for the allocation of financial risk as between the plaintiff and defendant pending the determination of disputes over the matters contemplated by GC47.0.

44 I turn, therefore, to the claims to be entitled to make deductions under GC47.0 presently advanced by the defendant in support of its resistance to this application. While the evidence before me has sought to go into quite a deal of detail about aspects of the merits of these various claims it is inappropriate at this interlocutory stage to attempt to determine the merits of apparently genuine or bona fide, but disputed, claims. In my view it is necessary, however, for the purposes of the general conditions of contract, that the defendant demonstrate that it has a bona fide claim to be entitled to deduct moneys pursuant to GC47.0 which exceed any moneys due or becoming due from it to the plaintiff pursuant to GC45.

45 There is a claim for $900,000 for liquidated damages. This is disputed on the basis that if the plaintiff's claims for extensions of time were properly considered there would be no delay which could found any claim for liquidated damages. This appears clearly to involve a dispute pursuant to the contract and there is no reason to think that the position of either party is other than bona fide. While there is much material before me as to the merits of this claim it is not one that I can or should properly consider and seek to resolve at this point.

46 The plaintiff also claims that the provision for the payment of liquidated damages for delay of $30,000 per day is a penalty. I accept from the evidence of the defendant that this figure was determined by it on the basis that it would lose sales revenue in the event of delay. This sales revenue it calculated by reference to the specified maximum production capacity of the plant of 12 terajoules per day and the selling price for the gas which it had agreed with Pasminco of $2,500 per terajoule, ie $30,000 per day. The plaintiff contends this is an unjustified basis for a genuine pre-estimate of loss as it ignores the cost of production and assumes that the sales are forever lost whereas gas which is not produced because of delays in completion of the plant remains gas available to the defendant to be sold at a later time, ie the sale is merely deferred, not lost. There is much more to this issue in the evidence before me and it is clearly one which cannot be resolved at this stage. In the

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special conditions of contract, by SC13.7, the plaintiff expressly acknowledged that the liquidated damages in question had been calculated as a reasonable and good faith assessment of the anticipated or actual loss and damage. This cannot be ultimately determinative, of course, but in view of this provision and the basis on which the figure was pre-determined, it appears to me that it must be accepted at the present time that the defendant is pursuing a bona fide claim in respect of liquidated damages. I would add, to avoid misconception, that were it the material issue I would also accept that the plaintiff has an arguable case that $30,000 per day is a penalty.

47 The defendant also seeks to deduct approximately $466,000 in respect of its estimated cost of future rectification works. It appears this figure may be subject to a deduction of some $166,000 in respect of works which have now been undertaken by the plaintiff. I will treat it as a claim to $300,000. There appears to be a difficulty in the way of bringing this claim within GC47.0 as the estimated costs of future rectification works are not debts or moneys now due from the plaintiff, nor are they amounts that have been "paid or incurred" by the plaintiff. In these respects the claim appears premature.

48 A substantial item is the claim for $1,226,880 for purchasing gas. The defendant's case is that by virtue of the defective works the defendant has, at times, been unable to produce gas for sale when and as required pursuant to its separate agreement for the sale of processed gas to Pasminco. As a consequence, it is the claim of the defendant that it has been necessary for it to purchase gas from other suppliers so as to be able to deliver gas when and as required by its agreement with Pasminco. In this respect, it appears to me that the loss or damage claimed to support the deduction of $1,226,880 is not directly related to the Works themselves or to the performance of the actual contractual obligations of the plaintiff, but to consequential commercial loss involving the defendant's obligations under a quite distinct agreement - the sale agreement between the defendant and Pasminco. While GC47.0(b) refers to "damages" incurred by the defendant, it is not presently apparent that an unliquidated claim for damages of this nature is within the intended scope of the provision. It is my present view that this claim reaches beyond the contractual terms and that a self-help deduction for this purpose is not authorised by GC47.0.

49 There is a further issue namely that the claim is for the purchase price of the gas but no allowance has been made for its sale price. If such allowance were made the claim would be reduced to approximately

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$300,000. The defendant's answer to this involves the life expectancy of its gas field, its anticipated reserves, questions of the marketability of relatively small residual gas reserves and the profitability of their extraction. By way of counter answer the plaintiff's case is that the defendant is in fact in the position where its present gas reserves are insufficient either to meet its present contractual obligation to Pasminco or to provide a viable return on the whole undertaking. I certainly do not propose to get into the merits of these issues but their nature, in my view, is enough to underline the view I take that this claim goes beyond anything contemplated by way of an authorised deduction by GC47.0 no matter what might be the strength of the defendant's case on the ultimate merits of this issue.

50 The defendant relies heavily on alleged defects in the plant's slugs handling capacity and on a consequential need to have increased resort to pigging. These issues, in substantial part, support the defendant's claims both for damages which have actually been incurred for rectification works and for damages in respect of future rectification works to the plant. Lost production time due to slugs and pigging was also the basis for over half of the claim for purchasing gas. It will be apparent that in a substantial part the claims in respect of these items have already been dealt with as not authorised by GC47.0, ie insofar as the claims are in respect of gas purchases and future rectification. Precisely what proportion of the balance of the defendant's claims are attributable to the issues of slugs and pigging is not readily discernible from the evidence before me. Some unidentified portion of the claim for rectifying defects and some part, perhaps even all, of the claim for additional labour costs is in respect of these items. It would seem probable that if the claims in respect of gas purchases and future rectification works attributable to these items were put aside, the defendant's claim to make deduction in respect of them would be less than $200,000.

51 A wealth of evidence is before me as to the merits of the respective positions of the parties about these related items. Given the view I have formed about other aspects of the case it is unnecessary to detail the issues and what can be made of the respective positions of the parties at this interlocutory stage. I should record, should it prove to be relevant, the view I have formed that the plaintiff clearly has demonstrated it has an arguable case that the problem in respect of these items lies not with the plaintiff's design and construction of the works, but with the specification for the treatment plant, and that this specification is not the work of or the responsibility of the plaintiff but is attributable to the defendant and other experts which the defendant engaged for this purpose. Further, insofar as

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the defendant seeks to counter this position by contending that the plaintiff had a duty to assess the work of the defendant's other experts and to warn the defendant that their work might be defective, it is my view that the plaintiff's position is clearly well arguable that no such duty was owed by it to the defendant in the circumstances. These observations are not intended to suggest that the defendant has failed to demonstrate it is not pursuing bona fide claims in respect of slugs handling and pigging. It has demonstrated this notwithstanding the apparent strength of the plaintiff's arguable case in respect of these issues.

52 The balance of the defendant's claims to make deductions under GC47.0 appear to be bona fide although in all respects they are disputed.

53 The position as it presently appears, therefore, is that the defendant is pursuing claims against the plaintiff which it has sufficiently shown to be bona fide and which would authorise deductions by the defendant under GC47.0 which total in the order of $1,273,000. This is a far cry from its claims to be entitled to deduct in the order of $2,800,000 which it sought to rely on in support of this application, but the total of these claims still exceeds the retention moneys held by the defendant. As indicated earlier the retention moneys total either $943,718 or just over $1 million. At most, therefore, as between the defendant and the plaintiff, the defendant would only be entitled to make a part call on the Banker's Undertaking.

54 There is, however, one further issue which appears most material to the resolution of this application. In these reasons, to this point, I have dealt with the respective merits of the parties as though the general conditions of contract spelt out the respective contractual obligations of the parties. The special conditions of contract, however, contain a provision which is most material to this application.

55 The special conditions of contract were clearly negotiated after the general conditions of contract in that they expressly amend some provisions in the general conditions and in other respects contain provisions which modify what would otherwise be the operation of the general conditions. It is the special conditions of contract which also contain the provision for liquidated damages for delay and which make provision for certain performance guarantees to be given by the plaintiff. Among the specific amendments to the general conditions of contract which are made by cl 10 of the special conditions are amendments to the extensive requirements of the general conditions with respect to insurance. The general conditions require insurances for a variety of risks

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to be taken out and maintained during the contract, and in some cases for periods thereafter, variously by the defendant and the plaintiff.

56 Clause 11.0 of the special conditions of contract is an unusual and difficult provision. It provides:

"11.0 LIMITATION OF LIABILITY

Notwithstanding anything else to the contrary, the liability of the Contractor under this Agreement shall be limited to the coverage and sums recovered under the policies of insurance provided by the Company and the Contractor pursuant to this Agreement. Contractor's total liability, whether insured or not, under the Contract or at law, shall be limited to $10m (ten million dollars) except as provided for in clause 9.1(b) of the General Conditions."

57 I received extensive submissions from each party as to the true construction of SC11.0 and its effect on what otherwise would be the provisions of the contract between the parties and in particular on the general conditions. The plaintiff relies in particular on the first sentence of SC11.0 to submit that whatever otherwise may have been the effect of the general conditions, SC11.0 should be seen to override that and to specifically limit the liability of the plaintiff, as the Contractor, to the coverage and sums recovered under the policies of insurance which the defendant and the plaintiff were required to maintain. It places particular emphasis on the opening words of SC11.0 viz "Notwithstanding anything else to the contrary …".

58 Even though this result is not one that would be immediately expected, and notwithstanding some difficulties with reconciling the second and the first sentences of SC11.0, and the obvious tension between SC11.0 and what might otherwise be the normal operation of the general conditions of contract, and notwithstanding the attempts by the defendant to read down or to provide some other understanding of the words of SC11.0, there is clearly an arguable case that, by the end of their pre-contractual negotiations, the parties to this venture agreed to limit the liability of the plaintiff to the cover provided under the insurances contemplated by the contract. The second sentence of SC11.0 can be seen to have been intended both to provide an overall limit of liability and to deal with the possible situation where there had been a failure by one

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party or the other to effect or maintain an insurance cover required by the contract.

59 Notwithstanding submissions to the contrary by the defendant, it is well arguable by the plaintiff that the claims to make deductions which the defendant seeks to advance in this case are all grounded in a want of due care by the plaintiff in the design and construction of the works. GC9.1(f) expressly required the plaintiff to take out and maintain insurances for the duration of the contract in respect of professional indemnity insurance for an amount not less than $10 million covering claims by the defendant against the plaintiff "arising out of or incidental to any negligent act, error or omission by (the plaintiff) in connection with the professional activities and duties of (the plaintiff) as designer of the Works and as the party responsible for the construction of the Works …". It was also required that this professional indemnity insurance was to be maintained by the plaintiff until the expiration of two years after the issue of the certificate of final completion.

60 There is thus an arguable case that the intended operation of the contract between the parties, as emerged in the end when the special conditions of contract were negotiated and agreed upon, was to the effect, at least so long as the requirements of the contract as to insurances were observed, that the plaintiff's liability to the defendant relevantly would be limited to the cover provided by the stipulated insurances. If this were so, it is arguably the case that no financial liability in respect of the present claims would rest with the plaintiff beyond that recovered under the relevant insurance cover.

61 The surprising nature of such a position is well evident. Nevertheless, the words of SC11.0 arguably are intended to have this effect. The plaintiff submits it was on this basis that its final tender price was based, the effective limitation of its liability provided by SC11.0 being a material consideration in reaching its tender price.

62 There is no issue as to the due compliance of the plaintiff and the defendant with the requirements of the contract as to insurances. It is arguably the position, therefore, that notwithstanding what would otherwise be the scheme of the general conditions including GC47.0, the only liability of the plaintiff to the defendant in respect of the present claims of the defendant is limited to sums which may be recovered under policies of insurance. It is not suggested that at this point any sums have been recovered by the plaintiff under the relevant policy of insurance.

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63 Given this most unusual feature of this case, which is the consequence of the unusual term to which the parties bound themselves, it appears to me that the interests of justice, in all the present circumstances, are best served by continuing the force of the present injunction which restrains the defendant from acting to pursue whatever might prove to be its entitlement to make a call on the Banker's Undertaking until such time as there is a final resolution of the respective rights of the parties in this action.

64 In reaching that view I have, of course, also had regard to the balance of convenience. Very little was advanced to me by the parties in respect of this. The submissions concentrated on the other issues which have been dealt with earlier in these reasons. I have taken into account inter alia the much reduced scope of the claims which on the present materials would come within the scope of GC47.0 were it not for the potential operation of SC11.0, the very substantial proportion of that sum which is presently held by the defendant by way of retention moneys, and the fact that the plaintiff has ensured that the contractual issues in dispute between the parties are now the subject of this action, despite apparent hesitancy or reluctance by the defendant to cooperate in efforts to resolve them (cf Cardile v LED Building Pty Ltd (supra) at 404 [53]), in weighing the balance of convenience.

65 There is some evidence before me which suggests that the defendant may be in financial difficulties and that it may have no prospects of recovering its investment in this gas field. Indeed it was the case for the plaintiff that it was because of these matters that the defendant was desperately pursuing unjustified claims. There is also evidence to the contrary as to the financial position of the defendant and its parent company. In any event, however, I would not be persuaded, by virtue of a perceived risk to the plaintiff that it might not be able to recover moneys paid under the Banker's Undertaking from the defendant by virtue of the defendant's financial position, to restrain the defendant from exercising its rights in respect of the Banker's Undertaking were that otherwise justified in all the circumstances; Hortico (Australia) Pty Ltd v Energy Equipment Co (Australia) Pty Ltd (1985) 1 NSWLR 545 at 553, Bachmann Pty Ltd v BHP Power New Zealand Ltd [1999] 1 VR 420.

66 Nevertheless, it appears to me that in the unusual circumstances of this case the balance of convenience lies in favour of maintaining the present financial status quo between the parties pending the determination of the respective merits of their cases in this action.

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67 The plaintiff also sought to support its claim for relief on the basis that it would be unconscionable and in contravention of s 51AA of the Trade Practices Act 1974 (Cth) for the defendant to make demand on the Banker's Undertaking in the present circumstances. The view I have formed as to the merits of other aspects of the plaintiff's case make it unnecessary to deal specifically with this alternative basis for relief.

68 For the reasons given it is my view that the defendant should be restrained until decision in this action from making or pursuing any demand on the Banker's Undertaking. I will hear counsel as to the precise form of the order.