Laing O'Rourke Australia Construction Pty Ltd v Kawasaki Heavy Industries Ltd

[2017] NSWSC 541

Supreme Court

New South Wales

Medium Neutral Citation:	Laing O’Rourke Australia Construction Pty Ltd v Kawasaki Heavy Industries Ltd [2017] NSWSC 541
Hearing dates:	13 & 28 April 2017
Decision date:	05 May 2017
Jurisdiction:	Equity - Technology and Construction List
Before:	Stevenson J
Decision:	Interlocutory injunction continued
Catchwords:	CONTRACT – consortium agreement – construction – performance bond – condition precedent to beneficiary’s entitlement to call on bond – whether beneficiary agreed not to call on bond unless it was called on to pay bond given by it to head contractor – whether interlocutory injunction restraining beneficiary from calling on bond should be continued
Cases Cited:	Bachmann Pty Ltd v BHP Power New Zealand Ltd [1998] VSCA 40 Barclay Mowlem Construction Ltd v Simon Engineering (Australia) Pty Ltd (1991) 23 NSWLR 451 Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd [2008] FCAFC 136; 249 ALR 458 CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [2017] WASC 112 EGL Management Services v Northern SEQ Distributor Retail Authority [2011] NSWSC 1234 Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; HCA 7 Lucas Stewart Pty Ltd v Hemmes Hermitage Pty Ltd [2010] NSWCA 283 Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; HCA 37 RCR O’Donnell Griffin Pty Ltd v Forge Group Power Pty Ltd (in liq) [2016] QCA 214 Re Golden Key Ltd [2009] EWCA Civ 636 Simic v NSW Land and Housing Corporation [2016] HCA 47 Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [2015] VSCA 98
Category:	Procedural and other rulings
Parties:	Laing O’Rourke Australia Construction Pty Ltd (Plaintiff/Applicant) Kawasaki Heavy Industries Ltd (Defendant/Respondent)
Representation:	Counsel: S Robertson (Plaintiff/Applicant) M Christie SC with N Simpson (Defendant/Respondent)   Solicitors: Squire Patton Boggs (Plaintiff/Applicant) CDI Lawyers (Defendant/Respondent)
File Number(s):	SC 2017/79847

Judgment

1. On 14 March 2017, the defendant, Kawasaki Heavy Industries Ltd, called on a number of performance bonds to the value of some $52.3 million issued at the request of the plaintiff, Laing O’Rourke Australia Construction Pty Ltd, in favour of Kawasaki by Swiss Re International SE, National Australia Bank Ltd and CGU Insurance Ltd. I will call these bonds the “Laing O’Rourke Bonds”.

2. The following day, 15 March 2017, Ball J granted Laing O’Rourke an ex parte interlocutory injunction restraining Kawasaki from calling on the Laing O’Rourke Bonds.

3. Kawasaki has withdrawn its call on the Laing O’Rourke Bonds pending the outcome of these proceedings. However, it maintains that it is, in the events that have happened, entitled to make the call.

4. Kawasaki has consented to the injunction continuing pending delivery of this judgment.

5. Laing O’Rourke seeks to have the injunction continued pending the determination of an arbitral tribunal which is to be appointed under the terms of a Consortium Agreement made between Kawasaki and Laing O’Rourke on 26 April 2012.

Background

6. Laing O’Rourke and Kawasaki are, together, parties to a subcontract dated 24 April 2012 with JKC Australia LNG Pty Ltd. I will refer to that document as the “JKC Subcontract”.

7. Pursuant to the JKC Subcontract, Laing O’Rourke and Kawasaki agreed to provide project management, engineering and other services to JKC in respect of the construction of a number cryogenic tanks (used to store liquefied natural gas) at a site near Darwin. JKC is the head contractor for the project.

8. It was a term of the JKC Subcontract that the “Subcontractor” (that is, both Kawasaki and Laing O’Rourke) provide an unconditional and irrevocable performance bond equal to 10 per cent of the contract price.

9. It was agreed between Kawasaki and Laing O’Rourke that Kawasaki (on behalf of both it and Laing O’Rourke) would establish that bond for JKC’s benefit. I will refer to it as the “Kawasaki Bond”.

10. For the purpose of performing their obligations under the JKC Subcontract, the relationship between Laing O’Rourke and Kawasaki was governed by the Consortium Agreement.

11. The Consortium Agreement divided the work to be done by Laing O’Rourke and Kawasaki under the JKC Subcontract.

12. Laing O’Rourke agreed to be responsible for the civil works and Kawasaki agreed to carry out what was described in the Consortium Agreement as mechanical, piping, equipment and electrical, and instrumentation works as well as “tests and commissioning”. Laing O’Rourke also agreed to perform certain obligations of the work within Kawasaki’s “allocated scope of work”, being work which was otherwise Kawasaki’s risk and responsibility. The parties called this work Laing O’Rourke’s “Subcontract Works”.

13. The Consortium Agreement also provided, in cl 14, that if JKC made a call on the Kawasaki Bond, then Kawasaki and Laing O’Rourke would have to “contribut[e] to the call in proportion to their liability pursuant to” the Consortium Agreement.

14. Clause 14 also obliged Laing O’Rourke to “provide surety bonds”.

15. I will return to cl 14.

16. On 12 June 2012, Kawasaki delivered to Laing O’Rourke, a “Purchase Order” pursuant to which Laing O’Rourke agreed to perform the Subcontract Works.

17. Article 6 of the special conditions to the Purchase Order also obliged Laing O’Rourke to “deliver to [Kawasaki] surety bonds”.

18. As I discuss below, Kawasaki contends that different considerations apply to the Laing O’Rourke Bonds established by reason of cl 14 of the Consortium Agreement than to those referred to in Art 6 of the Purchase Order. I do not agree. I explain why below.

19. The parties have now fallen out.

20. The time by which Laing O’Rourke and Kawasaki were to complete the works under the JKC Subcontract has long passed. On 31 January 2017, JKC asserted an entitlement to damages from Laing O’Rourke and Kawasaki in excess of $102 million.

21. JKC has not yet, however, called on the Kawasaki Bond.

22. On 15 March 2017, Kawasaki purported to terminate the Consortium Agreement. Laing O’Rourke has demobilised from the site. Kawasaki remains on site trying, it says, to complete the work under the JKC Subcontract.

23. Kawasaki and Laing O’Rourke each assert that the other is liable to it in damages on various bases.

24. Those disputes are to be referred to arbitration.

The issue

25. Each of the Laing O’Rourke Bonds is expressed to be unconditional and irrevocable and obliges the issuer to pay to Kawasaki the nominated amount on demand, without reference to Laing O’Rourke and notwithstanding any notice given by Laing O’Rourke not to pay the amount demanded.

26. No attempt is made by Laing O’Rourke to enjoin the issuers of the Laing O’Rourke Bonds from meeting any call made on them by Kawasaki.

27. Rather, Laing O’Rourke seeks to restrain Kawasaki, as beneficiary of the Laing O’Rourke Bonds, from making any such call on the bases that:

1. there is a serious question to be tried that, on the proper construction of the Consortium Agreement and the Purchase Order, Kawasaki has agreed not to call on the Laing O’Rourke Bonds until (at least) JKC calls on the Kawasaki Bond; and

2. the balance of convenience favours continuing the current restraint.

Decision

28. Laing O’Rourke has established its case.

29. The interlocutory injunction ordered by Ball J should be continued.

Serious question

30. A party who procures the issue of a performance bond can claim against the beneficiary that the beneficiary may not call on the bond if so to do would be a “breach of a contractual promise not to do so unless certain conditions are satisfied” (Simic v NSW Land and Housing Corporation [2016] HCA 47 at [8] (French CJ)).

31. That is what Laing O’Rourke seeks to do here.

32. Mr Christie SC, who appeared with Ms Simpson for Kawasaki, submitted that Laing O’Rourke must point to “clear words” in the Consortium Agreement inhibiting Kawasaki from calling on the Laing O’Rourke Bonds and cited the following statement, said to be “of fundamental importance in these proceedings”, by the Full Court of the Federal Court in Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd [2008] FCAFC 136; 249 ALR 458 at [83]:

“[C]lear words will be required to support a construction which inhibits a beneficiary from calling on a performance guarantee where a breach is alleged in good faith, that is, non-fraudulently”.

33. Mr Christie did not suggest this passage should be read to mean that, in every case of its kind, express words of inhibition are needed, but, rather, that it must clearly emerge that the parties intend there to be a constraint on the beneficiary’s right of recourse to unconditional performance bonds.

34. The correctness of the decision in Clough Engineering was doubted by Macfarlan JA (with whom Campbell JA agreed) in Lucas Stewart Pty Ltd v Hemmes Hermitage Pty Ltd [2010] NSWCA 283 at [37] – [43].

35. In any event, as the passage set out at [32] makes clear, the Full Court’s observations were directed to a circumstance where the contract in question provided that the condition precedent to a call on the performance bond by the beneficiary was a breach of the contract by the party that established the bond (the contractor).

36. In that regard, my attention has been drawn to a number such cases; for example, where, according to the words of the contract in question, the bond could be called on when the beneficiary was “entitled to exercise a right” against the contractor (Bachmann Pty Ltd v BHP Power New Zealand Ltd [1998] VSCA 40); or where the contractor “failed to honour” its obligations under the contract (Clough Engineering); or where the contractor “has not materially complied with its obligations under the contract” (Lucas Stewart); or where an amount “remains unpaid after the time for payment” (RCR O’Donnell Griffin Pty Ltd v Forge Group Power Pty Ltd (in liq) [2016] QCA 214); or where any amounts were “payable” by the contractor to the principal (CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [2017] WASC 112).

37. In those cases, the court considered whether, on the proper construction of the contracts in question:

1. the beneficiary was obliged to establish the existence of the condition precedent for access to the bonds (the default by the contractor) as an objective fact, or whether it was sufficient for it to contend, bona fide, that the condition precedent had been established; and (as an allied question)

2. the provision by the contractor of the performance bond served merely to provide a security to the beneficiary accessible once any dispute between it and the contractor was resolved; or also to ensure that the beneficiary had immediate access to a fund pending resolution of any such dispute, and, thus, to be what the authorities have described as a risk allocation device.

38. But here, Laing O’Rourke’s case is that, on the proper construction of the Consortium Agreement and the Purchase Order, the condition precedent to Kawasaki’s entitlement to call on the Laing O’Rourke Bonds is a call on it by JKC under the Kawasaki Bond; and not the existence of any alleged breach of the Consortium Agreement by Laing O’Rourke.

39. I do not accept that it is necessary to find “clear words” to reach a conclusion either way; or that the unconditional nature of the Laing O’Rourke Bonds means that there is a presumption in favour of a construction that permits recourse by Kawasaki to the Laing O’Rourke Bonds. The unconditional nature of the bonds is but one factor to be considered when looking at all of the relevant circumstances.

40. The question is to be determined in the usual way and by reference to the familiar principles, recently restated in Simic at [78]:

The proper construction of [a commercial contract] is to be determined objectively by reference to its text, context and purpose [Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at [35]; HCA 7; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 at 116–117 [46]–[52]; HCA 37]. As was stated in Electricity Generation Corporation v Woodside Energy Ltd at [35]:

[T]he objective approach [is] to be adopted in determining the rights and liabilities of parties to a contract. The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean… [I]t will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding ‘of the genesis of the transaction, the background, the context [and] the market in which the parties are operating’. As Arden LJ observed in Re Golden Key Ltd [[2009] EWCA Civ 636 at [28]], unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption ‘that the parties…intended to produce a commercial result’. A commercial contract is to be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience’. (footnotes omitted)”.

The Consortium Agreement – cl 14

41. Clause 14 of the Consortium Agreement is in the following terms:

“Security

(a)   [Kawasaki] must provide Security [defined to include a bond or bank guarantee; i.e. the Kawasaki Bond] in respect of the [JKC] Subcontract (to the extent required by the [JKC] Subcontract), and must bear itself the costs and obligations associated with the [Kawasaki Bond].

(b)   If a call is made on the [Kawasaki Bond] such that it results in the Parties not contributing to the call in proportion to their liability pursuant to this Agreement, then the Party of Parties that have contributed less must, on demand, pay the difference to the Party or Parties that have contributed more.

(c)   Where a call is made on the [Kawasaki Bond] and it is not possible to determine at the date of such call which Party is liable for the event which led to the call on the [Kawasaki Bond], then such call will be borne by [Kawasaki] until it is determined by the Steering Committee [which comprised two representatives of each of Laing O’Rourke and Kawasaki].

(d)   The Parties must use their best endeavours to mitigate any loss suffered as a result of a call on any [Kawasaki Bond].

(e)   Laing O’Rourke must provide surety bonds to [Kawasaki] in the following amounts:

(i)   10% of the value of the relevant portion of the Subcontract Price which relates to [Laing O’Rourke’s] Allocated Scope of Work and the [Laing O’Rourke] Subcontract Works, for securing Laing O’Rourke’s due performance of its obligations under the Subcontract; and

(ii)   that portion of the Advance Payment which relates to the [Laing O’Rourke] Allocated Scope of Work and the [Laing O’Rourke] Subcontract Works, for securing payment to Laing O’Rourke of its portion of the Advance Payment in accordance with the Subcontract.

(f)   The surety bonds in clause 14(e) must be provided by Laing O’Rourke to [Kawasaki] at the same time when [Kawasaki] is obliged to submit the [Kawasaki Bond] under the [JKC] Subcontract, and Laing O’Rourke must bear itself the costs and obligations associated with the surety bonds. Any other conditions of the surety bonds submitted by Laing O’Rourke to [Kawasaki] shall, unless otherwise agreed by the Parties before submission, be the same as the Security submitted to [JKC] by [Kawasaki] in accordance with the [JKC] Subcontract.

(g)   The surety bonds will be required for the same duration as the [Kawasaki Bond], is required under the [JKC] Subcontract and must be released by [Kawasaki] at the same time that the [Kawasaki Bond] is released by the [JKC] under [JKC] Subcontract. [Kawasaki] must provide Laing O’Rourke with immediate notice of a call on [the Kawasaki Bond].”

The Purchase Order

42. The Purchase Order provided that the following documents constituted “an integral part” of the Purchase Order and that, in the event of conflict between those documents, the “order of precedence” would be as follows:

1. the Purchase Order itself;

2. the Special Terms and Conditions of the Purchase Order;

3. the Consortium Agreement;

4. another document not relevant for present purposes; and

5. the General Terms and Conditions attached to the JKC Subcontract.

43. Article 6 of the Special Terms and Conditions of the Purchase Order (document “(2)” in this “order of precedence”) referred to the delivery by Laing O’Rourke of “surety bonds”.

44. It provided:

“Article 6: BONDS

[Laing O’Rourke] shall deliver to [Kawasaki] surety bonds in the form set out in Annexure 1A of [the JKC] SUBCONTRACT GENERAL TERMS & CONDITIONS pursuant to Article 35.1 ‘Bank Guarantees’ of [JKC] SUBCONTRACT GENERAL TERMS & CONDITIONS and Article 16 [sic] ‘Security’ of [the] CONSORTIUM AGREEMENT.

6.1 Advance Payment Bond

A surety bond for the Advance Payment Bond shall be issued and submitted to [Kawasaki] for a sum equal to ten per cent (10%) of [the Laing O’Rourke] SUBCONTRACT PRICE within thirty (30) days after the Effective Date of [the Laing O’Rourke] SUBCONTRACT.

The Advance Payment Bond must be valid from the Effective Date of [the Laing O’Rourke] SUBCONTRACT until the full amount of the Advance Payment has been repaid.

6.2 Initial Bond

Surety bonds for the Initial Bond shall be issued and submitted to [Kawasaki] within thirty (30) days after the Effective Date of [the Laing O’Rourke] SUBCONTRACT.

The amount of the Initial Bond must be equal to ten per cent (10%) of [the Laing O’Rourke] SUBCONTRACT PRICE and must be provided separately as two (2) bonds, each equal to five per cent (5%) of [the Laing O’Rourke] SUBCONTRACT PRICE.

One of Initial Bond [sic] must be valid from the Effective Date of [the Laing O’Rourke] SUBCONTRACT until thirty (30) days after the date of the last Provisional Acceptance Certificate stipulated in Article 19.3 ‘Provisional Acceptance Certificate’ of [JKC] SUBCONTRACT GENERAL TERMS & CONDITIONS.

The other one must be valid from the Effective Date of [the Laing O’Rourke] SUBCONTRACT until thirty (30) days after the date of the Final Acceptance Certificate stipulated in Article 21 ‘Final Acceptance” of [the JKC] SUBCONTRACT”. [Emphasis in original]

The Art 6 Laing O’Rourke Bonds

45. As I have mentioned at [18] above, Kawasaki contends that different considerations apply to the Laing O’Rourke Bonds established under cl 14 of the Consortium Agreement than to those referred to in Art 6 of the Purchase Order.

46. In particular, Mr Christie submitted that the Laing O’Rourke Bonds referred to in Art 6 of the Purchase Order are governed by the General Terms and Conditions of the JKC Subcontract (document “(5)” in the “order of precedence” under the Purchase Order; see [42] above), rather than by cl 14 of the Consortium Agreement.

47. This is significant, Kawasaki contends, because the JKC General Terms and Conditions contain a “no injunction” clause pursuant to which the “Subcontractor” purports to waive any right to seek an injunction to restrain a call on the performance bond in question. There is no such clause in the Consortium Agreement.

48. In my opinion, on the proper construction of the Consortium Agreement and the Purchase Order, all of the Laing O’Rourke Bonds are governed by cl 14 of the Consortium Agreement; none are governed the JKC General Terms and Conditions. Thus, I do not accept the submission referred to at [46].

49. Article 6 provides that the bonds to which it refers are to be provided pursuant to Art 35.1 of the General Terms and Conditions of the JKC Subcontract and “Article 16” of the Consortium Agreement.

50. It is common ground that the reference to “Article 16” is a typographical error and the reference should be to cl14 (hence the descriptor “Security”, which is the heading to cl 14).

51. Article 35.1 of the General Terms and Conditions of the JKC Subcontract concerns the form of the bonds (and provides that they should be unconditional and irrevocable).

45. Thus, Art 6 makes clear that the bonds to which it refers are to be issued under cl 14 of the Consortium Agreement and, like those bonds (see cl 14(f)), are to be on the same terms as the Kawasaki Bond.

46. I read Arts 6.1 and 6.2 as doing no more than providing further details of the bonds required to be established by Laing O’Rourke under cl 14.

47. Clause 14(e)(ii) of the Consortium Agreement provides that Laing O’Rourke must provide a bond for that “portion” of the “Advance Payment” (a payment to be made by JKC to Kawasaki and Laing O’Rourke under the JKC Subcontract) as relates to the work for which Laing O’Rourke was responsible under the JKC Subcontract and the Purchase Order (described as Laing O’Rourke’s “Allocated Scope of Work” and “Subcontract Works”).

48. Clause 14(e)(ii) does not specify what that “portion” is to be. Article 6.1 provides the relevant detail. It states that “[a] surety bond for the Advance Payment Bond” (this must be a reference to the “Advance Payment” referred to at cl 14(e)(ii); the additional word “Bond” must be an error) will have the particular characteristics set out.

49. Similarly, cl 14(e)(i) of the Consortium Agreement provides that Laing O’Rourke must provide a bond for the value “of the relevant portion of the Subcontract Price” that relates to the work for which Laing O’Rourke is responsible under the JKC Subcontract and the Purchase Order (described in the same manner as in cl 14(e)(ii)). Again, Art 6.2 provides the relevant detail. It refers to “Surety Bonds for the Initial Bond”. The wording is awkward, but must be a reference to the amount of the bond called for by cl 14(e)(i) of the Consortium Agreement.

50. In these circumstances, I accept the submission of Mr Robertson, who appeared for Laing O’Rourke, that Art 6 of the Special Conditions of the Purchase Order was not intended by the parties to extend the circumstances in which the Laing O’Rourke Bonds might be called on by Kawasaki. Rather, the language shows that the intention of the parties was that Art 6 was to confirm and, to a limited extent, supplement, cl 14 of the Consortium Agreement; but not in a way that modified or expanded the circumstances in which the Laing O’Rourke Bonds could be called on by Kawasaki.

51. I also accept Mr Robertson’s submission that the reference in Art 6 to Art 35.1 of the General Terms and Conditions of the JKC Subcontract takes the matter no further. Article 35.1 deals principally with the formal matters such as the formal duration of the relevant bank guarantees (and, in particular, provided that it would be unconditional and irrevocable) and does not deal with the circumstances in which a bank guarantee or bond may be called on. I see nothing in Art 35.1 of those General Terms and Conditions to support a conclusion that it was the intention of the parties to permit Kawasaki to call upon the Laing O’Rourke Bonds in broader circumstances than those contemplated by cl 14 of the Consortium Agreement.

The proper construction of cl 14

59. Clause 14 of the Consortium Agreement does not state, in terms, in what circumstances Kawasaki is entitled to call on the Laing O’Rourke Bonds.

60. However, the structure of cl 14 suggests, very strongly in my opinion, that it was the intention of the parties that Kawasaki could only call on the Laing O’Rourke Bonds if a call had been made on it by JKC under the Kawasaki Bond.

61. Clause 14(a) obliged Kawasaki to provide the Kawasaki Bond to JKC (in effect, on behalf of both Kawasaki and Laing O’Rourke as subcontractors).

62. Clause 14(b) provides that if JKC makes a call on the Kawasaki Bond, then each of Kawasaki and Laing O’Rourke must contribute to the call “in proportion to their liability”, as between themselves, under the Consortium Agreement.

63. Clause 14(c) then deals with what is to occur if it is “not possible to determine” which of Kawasaki and Laing O’Rourke is “liable for the event which led to the call” by JKC on the Kawasaki Bond. The parties agreed that, in that event, the call by JKC “will be borne by” Kawasaki until the matter “is determined” by the “Steering Committee”.

64. Laing O’Rourke and Kawasaki have equal representation on the Steering Committee. Clause 10.3(d) of the Consortium Agreement provides that if there is a deadlock on the Steering Committee, the matter is to be dealt with under the “Dispute Resolution” provisions of the Consortium Agreement (at cl 19); that is, in effect, by arbitration.

65. Thus, the parties agreed that if it was “not possible to determine” which of Kawasaki and Laing O’Rourke was, in effect, responsible for the event that led to the call by JKC on the Kawasaki Bond, the dispute would be referred to arbitration. The fact that the parties agreed that, pending the determination of the Steering Committee, the burden of any call by JKC would be “borne” by Kawasaki, suggests that it was the agreement of the parties that, until such a determination was made (and, in the event of deadlock on the Steering Committee, the matter be determined by arbitration), Kawasaki could not call on the Laing O’Rourke Bonds, notwithstanding a call made by JKC on the Kawasaki Bond.

66. However, as JKC has not made a call on the Kawasaki Bond, this question does not arise.

67. Next, cl 14(e) provides for Laing O’Rourke to provide the Laing O’Rourke Bonds.

68. Mr Christie placed particular emphasis on the provision in cl 14(e)(i) that the bonds there referred to were for the purpose of “securing Laing O’Rourke’s due performance of its obligations under the [JKC] Subcontract”.

69. Mr Christie submitted that those words bespoke the intention of the parties that Kawasaki would be entitled to call on the Laing O’Rourke Bonds if Laing O’Rourke was in breach of any of its obligations to Kawasaki under the Consortium Agreement (and not only if JKC made a call on the Kawasaki Bond).

70. However, cl 14(e)(i) must be seen within the context of cl 14 as a whole.

71. That context points strongly to the conclusion that Laing O’Rourke’s “obligations under the [JKC] Subcontract” referred to in cl 14(e)(i) are its obligations (jointly with Kawasaki) under the JKC Subcontract to provide an unconditional, irrevocable performance bond equal to 10 per cent of the contract price under the JKC Subcontract (see [8] above).

72. As I have set out at [9] above, it was agreed between Kawasaki and Laing O’Rourke that Kawasaki would, on behalf of both it and Laing O’Rourke, establish that bond (the Kawasaki Bond) for JKC’s benefit.

73. Clause 14(b) of the Consortium Agreement provides that, if JKC made a call on the Kawasaki Bond, then Laing O’Rourke was obliged to contribute its “proportion” of the liability (pursuant to the Consortium Agreement) to that call.

74. In that context, I read the reference in cl 14(e)(i) to the securing of Laing O’Rourke’s due performance of its obligations under the JKC Subcontract as referring to Laing O’Rourke’s obligation to “contribute” its “proportion” to any call made by JKC on Kawasaki under the Kawasaki Bond (and not to such other obligations as Laing O’Rourke has to Kawasaki under the Consortium Agreement itself).

75. Importantly, cl 14 then provides that:

1. the Laing O’Rourke security bonds be provided “at the same time” that Kawasaki was obliged to provide JKC with the Kawasaki Bond (cl 14(f));

2. the Laing O’Rourke Bonds be “for the same duration” as the Kawasaki Bond (cl 14(g));

3. the Laing O’Rourke Bonds “must be released” by Kawasaki at the same time that JKC released the Kawasaki Bond (cl 14(g)); and

4. Kawasaki must provide Laing O’Rourke with immediate notice of any call made on it by JKC under the Kawasaki Bond (cl 14(g)).

76. Mr Christie submitted that these provisions were matters “of convenience”.

77. I do not agree. Those provisions point strongly to the conclusion that, although they have not said so in terms, the parties intended that Kawasaki only be entitled to call on the Laing O’Rourke Bonds if JKC called on the Kawasaki Bond.

78. That is why the obligation on Laing O’Rourke to provide the Laing O’Rourke Bonds appears in the same clause as, and immediately after, the recitation of Kawasaki’s obligation to provide the Kawasaki Bond and the provisions concerning the obligation of the parties to share the burden of a call by JKC on the Kawasaki Bond; and why the parties agreed that the timing and duration of the Laing O’Rourke Bonds mirror those of the Kawasaki Bond. These factors point to the conclusion that the parties intended that the bond to be given by Kawasaki pursuant to cl 14(a) (the Kawasaki Bond) and the Laing O’Rourke Bonds be “back to back” bonds; the latter to provide security for Kawasaki’s liability under the former (subject to the regime in cl 14(c)).

79. It is true that cl 14(f) also provides that the Laing O’Rourke Bonds were to be issued on the same conditions as the Kawasaki Bond (that is, to be unconditional and irrevocable).

80. But, in the context in which it appears in this contract, I find the matter to be neutral. As Macfarlan JA said in Lucas Stuart:

“It is not obvious to me why the terms of the guarantee given by the issuer should have been regarded as affecting the proper construction of [the] provision…related to the circumstances in which the Principal was entitled to call on the guarantee.” [At [43]]

81. Philip McMurdo JA expressed a similar opinion in RCR O’Donnell Griffin at [94], as did McDougall J in EGL Management Services v Northern SEQ Distributor Retail Authority [2011] NSWSC 1234 at [64].

82. If, as I have concluded to be strongly arguable, cl 14 should be construed so that Kawasaki’s entitlement to call on the Laing O’Rourke Bonds is contingent upon JKC calling on the Kawasaki Bond, and that the Kawasaki Bond and the Laing O’Rourke Bonds should thus be seen as “back to back” bonds, it is unsurprising that the parties would agree that the Laing O’Rourke Bonds be issued on the same conditions as the Kawasaki Bond.

83. JKC has not called on the Kawasaki Bond.

84. In those circumstances, my conclusion is that there is a serious question to be tried as to whether Kawasaki is at the moment entitled to call on the Laing O’Rourke Bonds.

85. I would go further. In my view, it is strongly arguable that it is not.

Balance of convenience

86. In those circumstances, the balance of convenience favours, strongly, the continuation of the existing injunction.

87. First, in my opinion, for the reasons I have explained, the better view is that Kawasaki is not at the moment entitled to call on the Laing O’Rourke Bonds.

88. Second, Kawasaki has pointed to no substantial prejudice to it if the existing restraint is continued. Kawasaki is a very large company. It has shareholder equity of more than $US3.8 billion and cash on hand exceeding $US458 million. I accept Mr Robertson’s submission that there is no reason to think that the want of access to a sum in the order of $50 million pending the determination by the arbitral tribunal of the underlying dispute between the parties will or might cause prejudice towards Kawasaki of any substance.

89. Third, no arbitral tribunal has yet been established to deal with the underlying dispute. Laing O’Rourke thus cannot, at the moment, approach the arbitral tribunal to seek an order from it restraining Kawasaki from calling on the Laing O’Rourke Bonds. If the current restraint is dissolved, Laing O’Rourke will, in substance, forever lose the right to restrain a call on the Laing O’Rourke Bonds. It will, no doubt, then have to account to the issuers of the bonds in accordance with its arrangements with those parties, and will only be entitled to recoup whatever loss it thereby suffers if and when it is successful at arbitration.

90. Fourth, it appears likely that Laing O’Rourke may suffer significant prejudice if Kawasaki calls on the Laing O’Rourke Bonds in circumstances where it would be very difficult for Laing O’Rourke to prove, in monetary terms, what damage it has suffered; thus, damages may not be an adequate remedy in the circumstances.

91. In particular, there is evidence to suggest that if Kawasaki makes a call on the Laing O’Rourke Bonds that may prejudice Laing O’Rourke’s prospects of bidding for participation in an unrelated project. The party with whom Laing O’Rourke is negotiating (whose identity has, by consent, been concealed for reasons of commercial confidence) on 30 March 2017 wrote to Laing O’Rourke stating that a “key concern” it has regarding Laing O’Rourke’s financial situation is the likely impact of “the recent attempt by Kawasaki to pull [Lang O’Rourke’s] bond”. It has sought an undertaking from Laing O’Rourke to notify it of the outcome of this application and particulars of the impact of any call on Laing O’Rourke’s trading and cash flow forecast.

92. Were the current injunction to be dissolved and Kawasaki to call on the Laing O’Rourke Bonds, and Laing O’Rourke’s bid for this project to fail, an issue would arise as to whether such events were connected and as to the damage that Laing O’Rourke thereby suffers.

93. Fifth, there is evidence (admittedly at a high level of generality) to suggest that if Kawasaki is able to call on the Laing O’Rourke Bonds this might place Laing O’Rourke, or a related company, in breach of minimum cash requirements under a number of finance facilities.

94. Sixth, as Rolfe J said in Barclay Mowlem Construction Ltd v Simon Engineering (Australia) Pty Ltd (1991) 23 NSWLR 451 at 461, it is not difficult to infer that there would be damage to Laing O’Rourke’s reputation in the industry in which it operates if it became known that a performance bond had been called up, thereby carrying with it market concern about the perceived ability of Laing O’Rourke to perform its obligations under contract. I appreciate that it may be “notorious that disputes are commonly part and parcel of building contracts” (Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [2015] VSCA 98 at [233] (Kaye JA)). However, I find that the possibility of reputational damage weighs, albeit perhaps only slightly, in favour of continuing the restraint.

95. Overall, I am comfortably satisfied that the balance of convenience favours a continuation of the injunction.

Conclusion

96. Restraints to the effect of those ordered by Ball J on 15 March 2017 should be continued.

97. I invite the parties to bring in short minutes to give effect to these reasons.

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Decision last updated: 16 April 2018