Kvaerner Process Systems v AGL

[2001] HCATrans 473

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Perth  No P52 of 2001

B e t w e e n -

KVAERNER PROCESS SYSTEMS PTY LTD

Applicant

and

AUSTRALIAN GASFIELDS LIMITED

Respondent

Application for special leave to appeal

McHUGH J
CALLINAN J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 23 NOVEMBER 2001, AT 12.55 PM

Copyright in the High Court of Australia

MR W.S. MARTIN, QC:   May it please the Court, I appear on behalf of the applicant.  (instructed by Gadens Lawyers) 

MR J.D. McKENNA:   May it please the Court, I appear on behalf of the respondent.  (instructed by Freehills) 

McHUGH J:   Yes, Mr Martin. 

MR MARTIN:   Your Honours, in any circumstance in which the parties to a contract provide that one of them shall procure a creditworthy third party to promise to pay money to one of the parties to the contract, there are two quite separate and distinct relationships.  There is the relationship between the guarantor and the beneficiary of the guarantee, and there is a relationship between the contracting parties.  As between the guarantor and the beneficiary of the guarantee, it is almost invariable commercial practice to provide that the obligation to perform upon demand is unconditional, so that, when demand is made, the guarantor bank has no occasion, or, indeed, no obligation, to inquire into whether the demand is properly made. 

Now, your Honour, the fundamental flaw that we say underlies the Victorian line of cases which was followed in this case is to extrapolate from the consideration of the relationship between the guarantor and the beneficiary of the guarantee into the relationship between the contracting parties and to take the unconditional nature of the obligation to perform on demand, apply that into a different relationship – being the relationship between the contracting parties – for the purpose of concluding that that relationship is similarly unconstrained and that, therefore, there is an entitlement to make demand, even though the entitlement to payment may not yet be established. 

Your Honours, we say that is a fundamental flaw in logic and it is a fundamental flaw that invades the entire line of authority in what I might call the Victorian cases which have been applied in this case.  It is an error of general application because it is an error of logic, because it fails to adequately distinguish between those two very different relationships.  It has led to what is almost a presumptive rule of interpretation of contracts of this kind, to the effect that, in the absence of express words, they involve an allocation of risk as to who should be out of pocket pending the determination of the dispute between the parties.  It is that allocation of risk principle that, as I say, has been applied here and has become almost a presumptive rule, as a consequence of the observations of Justice of Appeal Callaway in the Fletcher Case, which was heavily relied upon, both at first instance and in the Full Court. 

Your Honours, if I could go to the relevant provision of the contract, which is clause 47.0.  Your Honours will find it at page 13 of the application book, in the judgment of his Honour Justice Parker, at the very bottom of that page.  It is common ground, I think – it was certainly common ground below – that this is the clause that defines the circumstances in which demand can be made.  Now, there are two limbs to it.  The first, top of page 14, is, demand can be made in respect of: 

amounts equal to all debts and moneys due from the Contractor –

The second limb is in respect of: 

amounts equal to all costs, charges, damages, liquidated sums and expenses which the Company has paid . . . for which the Contractor or its Sub-contractors is or are liable to bear –

So that the second limb depends upon the establishment, we say, of liability as a matter of fact and law.  The first limb refers to “debts and moneys due”.  The cases establish quite clearly that those are concepts that apply to established amounts, liquidated sums and so forth.  So that we say, by the plain and ordinary language of the provision, before demand can be made there must be an entitlement.  Now, there is either an entitlement or there is not.  Where there is a dispute as to the existence of an entitlement, then conventional principles relating to the grant of interlocutory relief apply and one goes ‑ ‑ ‑

McHUGH J:   Yes, but what is put against you, Mr Martin, is that you conducted the case in the Full Court on the basis that the judgment of the primary judge was correct. 

MR MARTIN:   Can I deal with that immediately, your Honour.  If I could go to the judgment in the Full Court, there are three paragraphs that are relevant.  The first is paragraph 16, which is, I think, at page 60 of the application book.  There, Justice Templeman observed: 

The question arising in this case is whether the appellant is entitled to call on the undertaking when there are disputes about the claims it has made –

That was the question posed.  Could I then go to paragraph 26, at the bottom of page 62, where again his Honour observes: 

I accept the appellant’s primary submission that where, as here, a security has been provided as a risk allocation device, the party having the benefit of that security should be entitled to enforce it if he has a bona fide claim . . . The claim may be weak –

et cetera.  Then his Honour goes on in paragraph 27: 

On that basis alone, I would allow the appeal. 

So that was said to be at the heart of the case.  Then, finally, in the judgment, if I could take your Honours to paragraph 40, where, on page 65, his Honour observed: 

Put another way, there was, in my view, nothing in the contract between the parties which inhibited the appellant from making a demand upon the Bank. 

He then goes on to express agreement with Justice of Appeal Callaway in Fletcher.  If I could take your Honours back to the transcript of argument before the Full Court and, in particular, to page 38 of the application book, just above line 10, Justice Templeman put to counsel then appearing for the applicant: 

I – understand your primary submission, Mr Clifford.  You say that it’s not enough that there should be a bona fide dispute in an engineering sense . . . 

TEMPLEMAN J:   Obviously there must be such a bona fide dispute, but then you say that even if there is, you then have to look at the underlying contractual provisions and see whether there is an arguable fetter on the right to call up the guarantee. 

CLIFFORD, MR:   Yes, precisely. 

TEMPLEMAN J:   And if there is an arguable fetter, then an injunction could lie if the balance of convenience favours it. 

Now, your Honours, unfortunately omitted from the application book is another portion of the transcript.  Can I just hand up a copy of the transcript of the proceedings before the Full Court and invite your Honours’ attention, in particular, to pages 58 and 59.  At the bottom of page 58, dealing with this question in reply, counsel for the then appellant, current respondent, had this proposition put to him by Justice Anderson: 

I thought it went like this:  you first looked to the claim itself, that is the contractual claim or the engineering claim or however you like to describe it, to see whether it is bona fide, and if it is, that is if that question is answered in favour of the holder of the security, beneficiary, still you look to see whether there is an arguable case that under the contract on its proper construction there is a restriction or fetter on the right to present the papers. 

Then it is conceded by counsel for the current respondent:

that’s the contention which my friend puts.

Can I just, while your Honours have the transcript – I will not take you through it – but the entire line of Victorian cases was canvassed at considerable length by counsel for the then appellant, commencing at pages 14 right through to page 39, 25 pages.  The bulk of the appeal was occupied with argument pertaining to the Victorian line of cases, which is why it is not surprising that, at paragraph 26, Justice Templeman said: 

I accept the appellant’s primary submission –

et cetera.  That is the passage I took your Honours to earlier.  So, with respect, it was clearly raised.  There are also the written submissions.  Your Honours have seen those in the application book – I will not take you to them.  But, with respect, it has always been this applicant’s contention that the starting point for the consideration of these issues is the construction of the contract, and that, properly construed, this contract does not give rise to an entitlement to call merely on the basis of a bona fide claim. 

Now, another point that is put against us is the proposition that this case should not go forward to the High Court because the interpretation issue has only been “tentatively” decided against us.  With respect, there is a fundamental flaw in that proposition, and it is this.  If that is right, then it follows as a matter of logic that there is a serious question to be tried on the construction issue; that is to say, a serious question to be tried as to whether there is an entitlement to make demand merely on the basis of a bona fide claim, rather than an established entitlement. 

If that be right, then the next question which the court was obliged to consider was the balance of convenience, but in the Full Court, that issue was resolved against us on the basis that preservation of the status quo involved allowing the guarantee to be called.  If I could invite your Honours’ attention to the bottom of page 65 in paragraph 44.  When dealing with the question of status quo, Justice Templeman, with whom Justice Anderson agreed, said: 

Nor am I attracted to the proposition that the status quo in this case is represented by the uncalled bank undertaking:  and that the status quo should be preserved by injunction.  In my view, the status quo is

that the appellant has the benefit of a security which has been put in place as a risk-allocation device. 

Now, that is a clear determination of the substantive issue adverse to the current applicant. 

McHUGH J:   But it is not a final determination.  It has been said, again and again, that ‑ ‑ ‑

MR MARTIN:   It was determinative of the application for an interlocutory injunction which, in our submission, will be effectively substantively determinative of this issue, because when the matter goes on to trial, the matter that will be tried will be the substantive liabilities between the parties, that is, the engineering dispute will be tried.  After that, there will be a determination as to the balance of account.  No subsequent question will arise for consideration of the calling on of the guarantee, because there will be a balance of account one way or the other and there will be a credit for the amount called for the guarantee, whether it was properly called or not. 

That is why we say that this is one of those exceptional cases in which leave should be granted notwithstanding that the matter is interlocutory in nature, and that is because this particular issue will always be decided on an interlocutory basis.  It almost never goes on, and none of the cases in the…..line of authorities involve substantive determination after trial, because the issue necessarily goes away.  Either the guarantee is called or it is not, and then the sum in question goes into the balance of account between the parties.  So, if this issue is ever to be resolved by this Court, and the conflict between those two lines of authority is ever to be determinately resolved, then it will have to be in the context of an interlocutory appeal. 

In our submission, this is an appropriate vehicle for it, because the contractual provision is very similar to that which is found in all the other cases.  The question is whether one starts, as we say, from the erroneous, flawed position of the Victorian cases by looking at the terms of the guarantee to construe the circumstances in which it can be called.  The flaw is applying the terms of the undertaking between guarantor and beneficiary to resolve the rights as between the contracting parties, when one must primarily go to the contract itself for that, uninfluenced by a presumption in favour of the risk allocation construction.  Your Honours, the point is a fairly short one.  I think the matter is outlined in the written submissions.  I do not propose to say anything further.  May it please the Court. 

McHUGH J:   We need not hear you, Mr McKenna.

This is an application for special leave to appeal in respect of a refusal of an interlocutory injunction to restrain the respondent from availing itself of the benefit of an undertaking by a bank to pay to the respondent on demand money claimed by the respondent to be owing by way of damages for breach of contract between the respondent and the applicant.  In the principal proceedings, the applicant seeks damages for breach of contract from the respondent.  Whether the respondent is entitled to make demand upon the undertaking turns upon the proper construction of the contract, particularly clause 47.0 thereof.

In the Supreme Court of Western Australia, the applicant argued that the respondent’s entitlement to call upon the undertaking did not extend to the subject matter of its claim, which was for unliquidated damages.  The applicant also argued that the respondent was impecunious to the extent that it would not have the capacity to meet the applicant’s claim against it and to refund money paid pursuant to the undertaking, if the applicant ultimately succeeded in the action.  Accordingly, the applicant argued that the balance of convenience also favoured the grant of an injunction.

The decision of the Supreme Court of Western Australia was an interlocutory one.  It turned upon the construction of a particular contract, not in any standard or common form.  It would not have been possible and was not appropriate on the interlocutory application of the applicant for the Court to resolve the competing claims of the parties as to the current and future solvency of the respondent.

In those circumstances, the case does not call for the grant of special leave to appeal and the proper order is that the application for special leave must be refused.

MR McKENNA:   Your Honours, there are injunctions and stays that are in place until 6.00 pm tonight.  May we ask that they be discharged?

McHUGH J:   Yes, the injunctions and stays are discharged.  Any other orders sought?

MR McKENNA:   And the ordinary order for costs.

McHUGH J:   Yes.  There is nothing you can say about it?

MR MARTIN:   No, there is nothing, your Honour.

McHUGH J:   The application is dismissed with costs.

AT 1.10 PM THE MATTER WAS CONCLUDED