Lend Lease Pty Ltd v Sugar Australia Pty Ltd
[2014] VSC 476
•24 September 2014
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. S CI 2014 04183
| LEND LEASE SERVICES PTY LTD (ACN 081 540 847) | Plaintiff |
| v | |
| SUGAR AUSTRALIA PTY LTD (ACN 081 245 169) | Defendant |
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JUDGE: | Vickery J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 29 August 2014 |
DATE OF JUDGMENT: | 24 September 2014 |
CASE MAY BE CITED AS: | Lend Lease Pty Ltd v Sugar Australia Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2014] VSC 476 |
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CONSTRUCTION CONTRACT – Recourse to a security provision – Bank guarantees as security – Construction of clause – Whether a triable issue.
INJUNCTION- Interlocutory injunction application - Approach where proper
construction of a contract is in issue - Triable issue – Balance of convenience - Inadequacy of damages – Injunction granted.
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APPEARANCES: | Counsel | Solicitors |
For the Plaintiff For the Defendant | Mr PJ Jopling QC with Mr DJ Fahey of Counsel Mr F Corsaro of SC with Mr D McAndrew of Counsel | King and Wood Mallesons Thomson Geer |
HIS HONOUR:
Introduction
The Plaintiff seeks an interlocutory injunction to restrain the Defendant from seeking recourse to bank guarantees provided by the Plaintiff to a third party bank in the course of a construction project.
In this proceeding the Defendant (‘Sugar Australia’) as the Principal under a construction contract seeks immediate recourse to two bank guarantees provided by the Plaintiff (‘Lend Lease’), which was the Contractor, in the total sum of $4,190,000 (the ‘Bank Guarantees’). Lend Lease provided the Bank Guarantees as security for its performance of a contract (the ‘Construction Contract’), to upgrade a refined sugar station at Yarraville in Victoria (the ‘Project’). Lend Lease has since terminated the Construction Contract.
Lend Lease has a number of outstanding claims of significance against Sugar Australia arising from the Project.
Lend Lease contends that:
(a) Sugar Australia has no entitlement under the Construction Contract to seek recourse to the Bank Guarantees;
(b) Sugar Australia's notice of recourse to the Bank Guarantees 8 August 2014 is invalid under the Construction Contract; and
(c) should Sugar Australia have recourse to the Bank Guarantees, Lend Lease will suffer significant commercial damage and reputational damage in the building industry.
In these circumstances Lend Lease seeks an interlocutory injunction to restrain Sugar Australia from having recourse to the Bank Guarantees.
Principles for the Grant of an Interlocutory Injunction
I set out below the principles governing the circumstances in which the Court will grant interlocutory injunctions. These principles are well established, but for present purposes bear repeating.
In Australian Broadcasting Corporation v O'Neill, Gleeson CJ and Crennan J observed:
[I]n all applications for an interlocutory injunction, a court will ask whether the plaintiff has shown that there is a serious question to be tried as to the plaintiff s entitlement to relief, has shown that the plaintiff is likely to suffer injury for which damages will not be an adequate remedy, and has shown that the balance of convenience favours the granting of an injunction. These are the organising principles, to be applied having regard to the nature and circumstances.[1]
[1]Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57, 68 [19].
Thus the granting of injunctive relief is discretionary and the Court must be satisfied that:
(a) there is a serious question to be tried in the sense that the plaintiff must show a sufficient likelihood of success to justify in the circumstances the preservation of the status quo pending trial;
(b) if there is no injunction but the plaintiff claim is ultimately vindicated, the plaintiff will have suffered irreparable harm for which damages will not be an adequate remedy; and
(c) the balance of convenience must favour the grant of the injunction.[2]
[2] Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148 , 153–4; (Mason CJ), ; See also ABC v Lenah Game Meats (2001) 208 CLR 199 (Gleeson CJ); Australian Broadcasting Corp v O’Neill (2006) 227 CLR 57(‘O’Neill ‘); Samsung Electronics Co Ltd v Apple Inc (2011) 286 ALR 257.
In addressing the first criterion, in Australian Broadcasting Corporation v O’Neill (‘O’Neill’) [3] the High Court also emphasised the need for the Court to carefully consider the nature and strength of the Plaintiffs’ case. In O’Neill, Gummow and Hayne JJ said that:
There is then no objection to the use of the phrase ‘serious question’ if it is understood as conveying the notion that the seriousness of the question, like the strength of the probability referred to in Beecham, depends upon the considerations emphasised in Beecham. [4]
[3]Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57.
[4]Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57, 70 (citations omitted).
In addressing the case of Beecham Group Ltd v Bristol Laboratories Pty Ltd[5], their Honours Gummow and Hayne JJ further explained the reference to the need for the plaintiff to establish a ‘prima facie’ case in the following terms: [6]
By using the phrase ‘prima facie case’, their Honours did not mean that the plaintiff must show that it is more probable than not that at trial the plaintiff will succeed; it is sufficient that the plaintiff show a sufficient likelihood of success to justify in the circumstances the preservation of the status quo pending the trial. That this was the sense in which the Court was referring to the notion of a prima facie case is apparent from an observation to that effect made by Kitto J in the course of argument. With reference to the first inquiry, the Court continued, in a statement of central importance for this appeal:
‘How strong the probability needs to be depends, no doubt, upon the nature of the rights [the plaintiff] asserts and the practical consequences likely to flow from the order he seeks’.
[Emphasis added]
[5]Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618.
[6]ABC v O’Neill (2006) 227 CLR 57, 82 [65] (citations omitted).
In this case, as in O’Neill, the nature of the claims advanced and the relief sought are of central importance. [7]
[7]ABC v O’Neill (2006) 227 CLR 57.
While typically set out as separate requirements, the High Court confirmed that these organising principles are to be considered together and inform one another.[8]
[8] Tymbook Pty Ltd v Victoria; Bradto Pty Ltd v Victoria (‘Bradto’) (2006) 15 VR 65 [84].
For example, where a plaintiff has an apparently very weak claim, the balance of convenience must be stronger so that, overall, the lesser risk of injustice lies in the granting of the injunction.[9]
[9] Ibid [85].
Woodward J said (Smithers and Sweeney JJ agreeing) in Bullock v Federated Furnishing Trades Society of Australasia: [10]
[A]n apparently strong claim may lead a court more readily to grant an injunction when the balance of convenience is fairly even. A more doubtful claim (which nevertheless raises a ‘serious question to be tried’) may still attract interlocutory relief if there is a marked balance of convenience in favour of it.
[10]Bullock v Federated Furnishing Trades Society of Australasia (1985) 5 FCR 464, 472.
As to the need to show a prima facie case, while the plaintiff does not need to satisfy the Court that it is probable (more likely than not) that the plaintiff will succeed at trial, it is necessary to show that there are sufficient prospects of success so as to justify the preservation of the status quo.[11]
[11]Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57, [65].
Standing back and assessing the whole of the evidence, the Court will be concerned to adopt the course which carries the ‘lesser risk of injustice’ if it should turn out to have been wrong.[12] The consequences of any injunction, including the impact of any injunction on the defendant and third persons, will also be relevant in the exercise of discretion, as will delay in the making of the application. Where (as here) the injunctive relief sought on an interlocutory basis is substantially the relief sought in the proceeding on the issue upon which the grant or refusal of the injunction will turn, the Court may pay particular attention to the prospects of success. [13]
[12]Bradto Pty Ltd v State of Victoria (2006) 15 VR 65, [35].
[13]Hartleys Ltd v Martin [2002] VSC 301; See also Brilliant Lighting (Aust) Pty Ltd v Baillieu [2004] VSC 248.
However, that is not to say that in determining to grant or refuse an interlocutory injunction the Court must finally determine an issue, even if the issue involves the construction of a contract.
It was urged on behalf of Sugar Australia by Mr Corsaro SC, who appeared with Mr D McAndrew, that given that a central issue in the proceeding was the construction of the relevant contract and because this did not depend for its construction upon the assessment of evidence but was confined to an examination of the four corners of the document the Court was obliged to finally determine the construction question at this stage of the proceeding. Indeed, it was said that the Court would fall into appellable error if it proceeded otherwise.
In making this submission, Sugar Australia placed reliance on the observation of Young JA in Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd,[14]a case which involved an application for an interlocutory injunction to restrain a claimed breach of a negative stipulation in a contract, where his Honour remarked as follows:
The first is that when there is an application for an interlocutory injunction which depends on the construction of a contract, it is for the judge to determine whether he or she has sufficient material to be able to construe the contract on a final basis. The urgency with which the case has to be heard or the lack of factual investigation to that point, may mean that the judge deals with the question of whether there is an arguable case on flimsy material. However, where a question of construction can be dealt with, then the decision on that matter is a final determination, and ordinarily, if no other remedy is given, a declaration should be made as to the construction of the contract.
[14]Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd [2010] NSWCA 283 at [73] (‘Lucas Stuart’).
However, this observation of Young JA in Lucas Stuart was obiter dicta. His Honour made the further observation that
‘…neither party has asked for it to be done [the making of a declaration as to the construction of the relevant contract] so that I will merely make the remark and go no further.’[15]
[15]Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd [2010] NSWCA 283 at [74].
Lucas Stuart was an application for leave to appeal. This was heard concurrently with hearing argument as to the merits of the appeal that would follow if the application for leave to appeal were granted.[16]
[16]Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd [2010] NSWCA 283 at [16].
The question in Lucas Stuart was whether the primary Judge’s conclusion that there was no serious question to be tried in relation to a notice issued by the principal which identified various defects that it required to be rectified, was correct. The ground of appeal pressed related to the construction of a clause of the relevant contract.
However, in Lucas Stuart, Campbell JA agreed with the reasons of Macfarlan JA, and neither made any mention of the approach mentioned by Young JA in relation to the hearing of an interlocutory injunction involving the construction of a contract. The majority adopted the usual approach to the construction issue in the context of an application for an interlocutory injunction. In granting leave to appeal and in finding that there was a serious question to be tried as to the validity of the relevant notice founded upon the proper construction of the contract, the Court of Appeal ordered an interlocutory injunction in the conventional way. The majority did not determine the contract construction issue on a final basis. The Court was not asked to, nor did it make a declaration as to the proper construction of the contract.
In any event, I do not accept that Young JA in Lucas Stuart was seeking to lay down any rule of general application, as contended for by Sugar Australia, to the effect that, in determining an application for an interlocutory injunction involving the proper construction of a contract, where there is no evidence (or any disputed evidence) which is relevant to determine the issue, the Court is compelled to make a final determination on the matter. In the case before him, his Honour considered this to be not possible where the parties (or one or other of them) had not specifically asked for a declaration as to the construction of the contract on a final basis at the interlocutory stage of the proceeding. In Victoria, this would ordinarily involve the Court ordering the trial of a separate question pursuant to r 47.04 of the Supreme Court (General Civil Procedure) Rules2005.
Further, I take it from the way his Honour framed his remark, that the suggested approach, although having the considerable potential benefit of resolving an issue between the parties at an early stage in the proceeding, would in any event yield to factors which may work against its application in a particular case, and ultimately it remains a matter for the discretion of the Judge as to whether the approach should be adopted.
Reference was also made to part of the decision of Charles JA in Fletcher Construction Australia Pty Ltd v Varnsdorf Pty Ltd.[17]
[17]Fletcher Construction Australia Pty Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812 , 821 (‘Fletcher’).
Fletcher involved an application by a building contractor (Fletcher) for interlocutory orders directed to its principal (Varnsdorf) which sought to restrain Varnsdorf from calling upon certain letters of credit. The application was heard in the Practice Court of this Court before Byrne J. Fletcher challenged Varnsdorf’s entitlement to call upon the letters of credit, principally on what it submitted was the proper construction of the relevant contract between the parties. His Honour rejected Fletcher’s arguments and refused the injunctions sought. Fletcher appealed this decision to the Court of Appeal.
In Fletcher, Charles JA said in a passage referred to by Sugar Australia:
Mr Archibald’s submission [made on behalf of Fletcher] on this first issue was that the terms of the agreement, properly construed, show that resort to the security under cl. 3.13 is subject to the express qualification that Varnsdorf’s entitlement must be undisputed. This qualification was not said to be implied or inferred. I did not understand it to be suggested that the determination of this point of law required the examination of a factual matrix not presently available. Accordingly this court should, in my view, now decide the question of law involved in the interpretation of the contract. Compare Hortico (Aust.) v. Energy Equipment Co. (Aust.) Pty. Ltd. (1985) 1 N.S.W.L.R. 545 at pp. 549, 554; Spry, Principles of Equitable Remedies, 5th ed., (1997). Pp.466-7.[18]
[Emphasis added]
[18] Fletcher Construction Australia Limited v Varnsdorf Pty Ltd (1998) 3 VR 812 per Charles JA (at 821).
Charles JA cited a decision of Young J in Hortico (Aust.) v. Energy Equipment Co. (Aust.) Pty. Ltd.[19] where it was said by his Honour:
On an application for interlocutory injunction which raises questions of law, the approach of this Court has been, I believe, to decide questions of law which arise unless in the opinion of the judge, those questions should be better left until later: Karaguleski v Vasil Bros & Co Pty Ltd [1981] 1 NSWLR 267 at 269. I think that the only exceptions to that general rule are where time does not permit proper consideration of the questions of law at the interlocutory stage, see Needham J's decision in Segulin v Car Owners' F Mutual Insurance Co Ltd (4 July 1984, unreported) or where the determination of the points of law requires a factual matrix which is not available until the facts in the entire proceedings have been proved.
[19]Hortico (Aust.) v. Energy Equipment Co. (Aust.) Pty. Ltd (1985) 1 NSWLR. 545, 549 (‘Hortico’)
Both the decision of Charles JA in Fletcher and that of Young J in Hortico in the passages referred to reinforce the view that, however desirable the final determination of a contractual construction issue in a contested proceeding at the stage of an interlocutory injunction application may be, the adoption of this approach is not mandatory nor is it axiomatic. It will depend on the particular circumstances of the case and the exercise of the discretion of the Court after weighing relevant factors.
Spry makes an observation to similar effect in the following passage:
Likewise where there is , not a conflict in the evidence as to matters of fact, but rather a dispute as to questions of law, the preparedness of the court to determine those questions depends on their difficulty and on the balance of convenience, regard being had both to the consequences of granting or refusing relief and also to the other relevant circumstances. Even where in a particular case the court is not disposed to decide a difficult question of law on an interlocutory application it is often found that the risk of injury to the plaintiff is such that interlocutory relief should be granted. [20]
[20] Spry, Principles of Equitable Remedies, 7th ed, (Thomson 2007) 466.
Although decided in a different context, being an application for leave to appeal from an interlocutory order of a managing Judge which granted leave to a party to file a further amended statement of claim where the issue involved the correct construction of s 729(1) Corporations Act2001, the decision of the Court of Appeal [21] in RSD Chartered Accountants v Bolitho carries some parallels to the present case. [22] Nettle JA said, in the course of refusing leave to appeal:
Whilst there is no authority on the point [construction of s 729(1) Corporations Act2001], and hence the correct construction of the section will need to be determined in the course of the proceeding, there is no question that the construction for which the respondent (plaintiff) contends is reasonably arguable.
In those circumstances, the submission advanced by senior counsel for the applicant, that it was incumbent on the judge below, and now incumbent on this Court on appeal, to determine the issue forthwith, is tantamount to saying that a court should be prepared on a strike out application to make a final decision on a debatable and contentious point of law on which there is as yet no authority. [23]
[21]RSD Chartered Accountants v Bolitho [2014] VSCA 186 (Nettle, Ashley and Hansen JJA).
[22]Bolitho v Banksia Securities Ltd & Ors (No 2) [2014] VSC 184.
[23]Bolitho v Banksia Securities Ltd & Ors (No 2) [2014] VSC 184 [16]- [17].
In this case I am of the opinion that the proper construction of the contract in question is best left to the trial of the proceeding for a final determination. The issues of construction raise difficulties. There is no authority directly on point on the proper construction of the contract clause in question. The Construction Contract in this case included a modified version of the General Conditions of Contract AS 4910–2002 for the supply of equipment with installation. These standard form conditions contained the clause in contention and are in general use in the engineering and construction industry. The potential for an ongoing precedent effect of a final determination as to construction of the clause and the Construction Contract generally must be taken into account. The construction issue in this case calls for careful reflection and demands full consideration. Further, the limited time available to the Court, coupled with the consequences to the parties of a final determination at this stage of the proceeding which may give rise to a degree of hardship arising from the scale of the money sums involved, are also factors to be taken into account. It is therefore appropriate in my view to reserve the construction questions to a final determination at the trial of the proceeding, or at least to the trial of a separate question pursuant to r 47.04 of the Supreme Court (General Civil Procedure) Rules2005 if such is ordered on an application made on proper notice.
I will proceed to determine this interlocutory application for an injunction in the conventional manner in accordance with the principles as stated in O’Neill.
Applications to Restrain Recourse to Security
The commercial purposes of security provisions involving provision of a bank guarantee in contract in question to be twofold: (a) to provide security to the holder by enabling recourse against a third party bank, thereby bypassing the need to recover directly against a party in default; and (b) as a buttress to the first, to allocate the risk as to which party should be out of pocket pending resolution of any dispute which may arise. [24] Depending on the construction of the relevant contract, the commercial purpose or purposes may be one or both of these possible objectives.
[24]Fletcher Construction v Varnsdorf [1998] 3 VR 812, 826 (Callaway JA).
The question of proper recourse to a security provided pursuant to a contract is governed by the terms of the contract itself, construed in accordance with the usual principles. However, in order to give effect to the commercial purpose or purposes of the provision of such security, the Court should not readily favour a construction which erodes or frustrates the purpose or purposes which are revealed.
In practice this has generally meant that clear words will be required to support a construction which inhibits a beneficiary from calling on a performance guarantee where the breach is alleged in good faith, i.e. non-fraudulently. [25]
[25] Fletcher Construction Australia Limited v Varnsdorf Pty Ltd (1998) 3 VR 812 , 820-821 (Charles JA) and 827 (Callaway JA); Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd (2008) 249 ALR 458 [82] – [83] (French, Jacobson and Graham JJ); See also Otter Group Pty Ltd v Maria Margeretha Wylaars & Anor [2013] VSC 98 [18](Hollingworth J).
The authorities on the point are summarised by Daubney J in Cerasola TLS AG v Thiess Pty Ltd & John Holland[26] as follows:
On the basis of those authorities, it is sufficient for present purposes to note that the general rule is that a Court will not enjoin the issuer of a performance guarantee from performing its unconditional obligation to make payment. A number of exceptions to that general rule have been identified. They are identified in Clough Engineering at [77] as:
(1) An injunction will issue to prevent a party in whose favour the performance guarantee has been given from acting fraudulently.
(2) An injunction will issue to prevent a party in whose favour the performance guarantee has been given from acting unconscionably in contravention of the Trade Practices Act 1974 (Cth).
(3) While the Court will not restrain the issuer of a performance guarantee from acting on an unqualified promise to pay if the party in whose favour the guarantee has been given has made a contract promising not to call upon the bond, breach of that contractual promise may be enjoined on normal principles relating to the enforcement by injunction of negative stipulations in contracts. Their Honours drew in that regard from the judgment of Austin J in Reed Construction Services v Kheng Seng (Australia) Pty Ltd (1999) 15 BCL 158 at 164.
[26] Cerasola TLS AG v Thiess Pty Ltd & John Holl [2011] QSC 115 (Daubney J).
Their Honours in the Full Federal Court said in relation to that last mentioned principle that: ‘it may be preferable not to describe this as an exception but rather as an over-riding rule because it emphasises that the 'primary focus' will always be the proper construction of the contract’.
Their Honours in Clough Engineering went further to refer to the judgment of the Full Court in Victoria in Fletcher, noting particularly the purposes identified in the Fletcher Construction case for which a beneficiary of a bank guarantee may have stipulated for same in a contract.
Looking at the contract as a whole, the question becomes whether the provision of the bank guarantee was merely for the purpose of provision of security or was a risk allocation device as between the parties pending resolution of a dispute, or had both of these purposes. The specific question of construction, to be determined amongst other things in the light of the purpose or purposes found, is whether, the contract confers an unfettered right to call upon the performance guarantee or whether exercise of the right is limited by some, and if so what, consideration or body of considerations.
The Full Federal Court in Clough Engineering said in this regard that: [27]
The question of construction as to whether the underlying contract contains a qualification on the right to call upon the security must be determined in light of the contract and the form of the performance guarantee as contained in the contract. This accords with the basic principle of construction that the terms of an instrument must be read as a whole.
[27] Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd (2008) 249 ALR 458 [85] (French, Jacobson and Graham JJ).
It follows that if a party in whose favour a bank guarantee has been given has bound itself to a contractual fetter or qualification under which that party promises not to call upon the guarantee in the circumstances defined, breach of that contractual promise, or a threatened breach, may be enjoined by applying the usual principles relating to the enforcement by injunction of negative stipulations in contracts.
The Clause to be Construed
I turn now to the clause in the Construction Contract to be construed in this case.
The Contract included a modified version of the General Conditions of Contract AS 4910–2002 for the supply of equipment with installation.
Pursuant to clause 5.1 and Item 14(a) of Annexure Part A of the General Conditions of the Construction Contract, Lend Lease agreed to provide two unconditional bank guarantees from BNP Paribas (without any expiry date) in the form prescribed in Annexure Part B of the contract. Further, pursuant to clause 5 and Item 14 (b) of Annexure Part A of the contract, the amount of security was $4, 190, 000, being 10% of the contract sum comprised of the two unconditional bank guarantees each in an amount of $2, 095, 000 representing 5% of the contract sum. The approved form of unconditional undertaking in Annexure Part B to the Construction Contract was entitled ‘Unconditional Undertaking’. The purpose of the security was relevantly expressed as follows:
….[the Bank] Unconditionally undertakes to pay on demand a sum or sums which may from time to time be demanded by [Sugar Australia] …
The undertaking is to continue until a notification has been received from [Sugar Australia] that the Sum is no longer required by [Sugar Australia] or until this undertaking is returned to the Bank or until payment to [Sugar Australia] by the Bank of the whole of the Sum or such part as [Sugar Australia] may require.
Should the Bank be notified in writing purporting to be signed by or for and on behalf of [Sugar Australia] that [Sugar Australia] desires payment to be made of the whole or any part or parts of the Sum, it is unconditionally agreed that the Bank will make the payment or payments to [Sugar Australia] forthwith without reference to [Lend Lease] and notwithstanding any notice given by [Lend Lease] to the Bank not to pay same.
Lend Lease provided the two unconditional Bank Guarantees in favour of Sugar Australia dated 28 June 2007 in conformity with clause 5.1 of the Construction Contract.
The circumstances in which Sugar Australia as the Principal is entitled to have recourse to the security provided by the Bank Guarantees are governed inter alia by amended clause 5.2 of the General Conditions of Contract (AS4910 – 2002) which provides as follows:
5.2 Availability of Security
Any security provided by the Contractor in accordance with the Contract shall be available to the Principal whenever the Principal may claim (acting reasonably) to be entitled to:(i) the payment of moneys or an indemnity by the Contractor under or in
consequence of or in connection with the Contract;
(ii) reimbursement of any moneys paid to others under or in connection with the Contract; or
(iii) other moneys payable by the Contractor to the Principal (whether by way of set-off or otherwise).
Recourse to security shall only be subject to the Principal having given the
Contractor 5 days' notice of its intention to have recourse to the security for the purpose of allowing the Contractor to replace the security with cash where it has been issued in a form other than cash. Where the Principal has recourse to security in accordance with clause 37.3, the Contractor shall provide replacement security in accordance with clause 37.3.
[Emphasis added]
Clause 5.2 provides for negative stipulations in relation to recourse to the security. The conditions are specified as follows:
(a) the Principal must make a ‘claim’ for the specified entitlements;
(b) the Principal must act ‘reasonably’ in making the ‘claim’;
(c) the ‘claim’ must be for an entitlement to :(i) the ‘payment of monies’ under or in consequence of or in connection with the Construction Contract; or
(ii) an ‘indemnity’ by Lend Lease under or in consequence of or in connection with the Construction Contract; or
(iii) ‘reimbursement of any monies paid to others under or in connection with the Contract’; or
(iv) other moneys payable by the Contractor to the Principal (whether by way of set-off or otherwise).
The notice provision under clause 5.2 provided another negative stipulation to the effect that recourse to security shall be subject to the Principal having given the Contractor 5 days' notice of its intention to have recourse to the security for the purpose of allowing the Contractor to replace the security with cash in the circumstances described.
No attempt is made in the Construction Contract to define what is meant by the condition requiring the Principal to act ‘reasonably’ in making the claim before the right to have recourse to the security may be exercised.
Principal’s Submissions on Clause 5.2 - ‘acting reasonably’
Sugar Australia contended that the words ‘acting reasonably’ invokes a solely subjective element which fixes on the beneficiary’s motive for making the claim for payment. Thus is was said, the words ‘acting reasonably’ only requires Sugar Australia to demonstrate that it has a bona fide arguable claim for an amount equal to or in excess of the amount of security. Accordingly, it is submitted that the words acting reasonably add little or nothing to the requirement that the beneficiary’s ‘claim’ is made bona fide and that the claim is not specious or fanciful or untenable.
Alternatively, it was put by Sugar Australia that if ‘acting reasonably’ also calls up an objective element, the question of whether Sugar Australia is ‘acting reasonably’ must be assessed having regard to the nature and purpose of the security and what someone else in Sugar Australia’s position would do in the circumstances. It submitted that once it is accepted that Sugar Australia has made a claim bona fide (the subjective component), in order to be disentitled from recourse on the premise that there was not a sufficient objective basis for the claim for payment, Lend Lease would need to establish that no reasonable person in the position of Sugar Australia would have formed the view that it had a claim to be entitled to payment. =
On this basis, Sugar Australia submitted that Lend Lease has not established that Sugar Australia has not satisfied either the subjective or the objective elements of the concept ‘acting reasonably’ in clause 5.2 of the Construction Contract.
Contractor’s Submissions on Clause 5.2 - ‘acting reasonably’
Lend Lease contends that there is a serious issue to be tried as to whether Sugar Australia has an entitlement under clause 5.2 of the Construction Contract to seek recourse to the Bank Guarantees in the circumstances where Sugar Australia it says is not ‘acting reasonably’ in seeking recourse, as required by clause 5.2 of the Contract, given that:
(a) Lend Lease contends that it has no indebtedness to Sugar Australia;
(b) Lend Lease's claims against Sugar Australia far exceed Sugar
Australia's claims against Lend Lease; and
(c) Lend Lease has the benefit of a liability cap (clause 43) under the
Construction Contract.
Lend Lease says that it validly terminated the Construction Contract on 28 September 2011. It submits that Lend Lease was thereby discharged from its further performance of the Construction Contract when it validly terminated the contract on 28 September 2011.22 Accordingly, Lead Lease says that Sugar Australia is not entitled to recover any amount towards its costs of completing the Project as Sugar Australia claims it is entitled to, and advances as a basis for its recourse to the Bank Guarantees. This is said to be not ‘acting reasonably’ within the scope of clause 5.2 of the Construction Contract.
Further, Lend Lease points to the size of its claims (in the sum of between $17,904,746 and $67,171,483.50), which it says dwarfs the claims of Sugar Australia (59,443,291.93) made against it. On this basis it was submitted that even if Sugar Australia's claims were ultimately found to be valid (which it denies), they would be set-off against the sum Sugar Australia would be required to pay Lend Lease. In these circumstances too Sugar Australia could not be said to be ‘acting reasonably’ in seeking recourse to the Bank Guarantees within the scope of clause 5.2 of the Construction Contract.
Lend Lease also points to the fact that it has the benefit of a liability cap under the Construction Contract provided by clause 43, and by reason of this provision, Sugar Australia could not be said to be ‘acting reasonably’ in seeking recourse to the Bank Guarantees within the scope of clause 5.2 of the Construction Contract.
Clause 43 provides a limitation on the liability of Lend Lease. Clause 43 provides as follows:
43 General limitation of liability
43.1 Limitation of liability of the Contractor
Subject to sub clause 43.2,the total liability of the Contractor arising in connection with the subject matter of the Contract including a claim:
a) in tort;
b) under statute; or
c) for rectification or frustration, or like claim available under the law governing the Contract is limited as follows:
(i) for a liability arising in connection with loss or damage to
properly (other than property required to be insured by
clause l6) and the death of or injury to any person (other
than liability which the law requires to be covered under a
workers compensation insurance policy) - $20 million;
(ii) for a liability arising in connection with the use of any
construction plant not covered under a comprehensive or
third party motor vehicle insurance policy - $20 million;
(iii) for a liability arising in connection with loss or damage to
any plant or material or the Equipment occurring before
delivery, or during their transit to and from the site
(including without limitation by air, sea or otherwise) and
during their loading or unloading at the site or any other
location - the full replacement value of all such plant,
material or the Equipment;
(iv) for a liability arising in connection with a breach of the
Contractor's professional duties, including without
limitation a failure to design the Works in accordance with the Contract (whether such failure was negligent or otherwise) - $15 million;
(v) for a liability arising in connection with the Contractor's responsibility for care of the things in sub clause 14.1 - the
contract sum as adjusted in accordance with the Contract;
and;
(vi) other than for events in relation to clause 43.lc)v) for a
liability arising from a claim relating to an indemnity
or loss for which the Contractor is not required to have
effected insurance cover under the Contract l0 % of the
contract sum in the aggregate as adjusted in
accordance with the Contract. The parties acknowledge
that this limitation includes the levying of liquidated
damages by the Principal under the Contract.
This limitation shall continue to apply notwithstanding fundamental breach, breach of a fundamental term, rescission, repudiation or termination for any reason or frustration, whether unintentional or by operation of law.
Notwithstanding any other provision of this Contract, neither the Principal nor the Contractor shall be liable to the other for any consequential, indirect or special loss or damage, including without limitation loss of profit or loss of revenue, or loss of use of the Works howsoever arising.
Lend Lease submitted that Clause 43.1(vi) is the relevant cap applicable to Sugar Australia's claims for the costs to complete the Project works and the costs to rectify defective works. It contended that the cap in clause 43.1(vi) applies to an ‘indemnity or loss’. The definition of ‘loss’ in clause 1 of the Contract is as follows:
loss means any loss, claim, action, legal costs, liability, damage, cost, charge, expense, outgoing, payment or deficiency of any kind or character which the Principal pays, suffers or incurs, or for which it is liable or may be liable.
Lend Lease submitted that the evidence establishes that the available balance of the liability cap stands at $2,024,215.2. This has been calculated as follows:
(a) the Contract price as adjusted was 542,485,189, of which I0% is $4,248,519; and
(b) Sugar Australia has previously deducted $2,095,000 of liquidated damages and $120,304 for negative variations from the liability cap. Sugar Australia's deductions were made prior to the termination of the Contract. This leaves a balance of $2,204,215.
On this basis Lend Lease submitted that even if Sugar Australia was ultimately found to have valid claims against Lend Lease, Lend Lease's liability would be limited to $2,024,215.
In these circumstances it was submitted that it is unreasonable for Sugar Australia to seek recourse to the entire sum of the Bank Guarantees (namely, $4,190,000) in circumstances that it, at most, is entitled to only $2,024,215. On this basis too, it was submitted that Sugar Australia is not acting reasonably as it is required, as a precondition under clause 5.2 of the Construction Contract, before it is entitled to have recourse to the Bank Guarantees.
Conclusions on Submissions on Clause 5.2 - ‘acting reasonably’
Whether there is a serious issue to be tried as to whether Sugar Australia has an entitlement under clause 5.2 of the Construction Contract to seek recourse to the Bank Guarantees in the circumstances advanced by Lend Lease, will in significant part depend upon the proper construction of the words ‘acting reasonably’ found in the clause, and in particular, whether these words are confined to a subjective analysis, or import the concept of an objective assessment.
I am satisfied that there is a serious issue to be tried as to at least two things in relation to clause 5.2 of the Construction Contract:
(a) the proper construction of clause 5.2 of the Construction Contract; and
(b) whether, if the words ‘acting reasonably’ included in the clause invite an objective analysis, the matters raised by Lend Lease establish, in all the circumstances, that Sugar Australia is not acting reasonably in seeking to call upon the Bank Guarantees, thus disentitling it to the recourse it seeks.
There is a serious question to be tried in the sense that Lend Lease has shown a sufficient likelihood of success to justify in the circumstances the preservation of the status quo pending trial.
The Recourse Notice
On Friday, 8 August 2014, Sugar Australia delivered to Lend Lease's office an undated letter addressed to Lend Lease Services (Australia) Pty Ltd that:
(a) claimed Lend Lease is liable to Sugar Australia for $9,903,365.93 in loss and damage being ‘the increased cost of completion of the work as well as rectification of defective work...‘, and;
(b) notified Sugar Australia's intention to have recourse to the Bank Guarantees. (the ‘Recourse Notice’)
Lend Lease submits that the Recourse notice fails to satisfy the requirements of clause 5.2 of the Construction Contract and is invalid for this purpose.
In seeking to make out this contention, Lend Lease relies on the following submissions:
(a) the Recourse Notice is not addressed to Lend Lease, but rather a non-existent entity, ‘Lend Lease Services (Australia) Pty Limited’. Accordingly, the Recourse Notice has not been validly issued as required by clause 5.2 of the Construction Contract;
(b) on a proper construction of clause 5.2 of the Contract, a call can only be made for payment or reimbursement of moneys presently due rather than for moneys which may become due in the future. Of the moneys claimed in the table at paragraph 8 of the Recourse Notice, only 2 items (item 3 and item 6) are for reimbursement of moneys said to have been expended by Sugar Australia as opposed to estimates of moneys that possibly may be spent in the future. Item 3, being for rectification costs, is in the sum of $481,803 and item 6, being for costs incurred for leaking RSS buildings, is in the sum of 5946,549, a total of $1,428,352. Sugar Australia's affidavit material acknowledges that apart from items 3 and 6 in the Recourse Notice, the claimed rectification works are yet to be carried out. As the Recourse Notice seeks to draw $4,190,000, which is greater than the 51,428,352 sum Sugar Australia is potentially entitled to claim pursuant to clause 5.2 of the Contract, the Recourse Notice is outside the framework of what is contemplated by clause 5.2 (namely monies that have been expended) and renders the Recourse Notice invalid; and
(c) the Recourse Notice is also invalid on the basis that it seeks to draw a sum greater than the available balance of the liability cap (2,024,215).
I am satisfied that Lend Lease has a sufficiently strong case on the basis of a defective Recourse Notice to find there is a serious issue to be tried to justify the grant of an interlocutory injunction.
Whether Damages Inadequate
I now turn to consider whether, if there is no injunction granted but the claims of Lend Lease are ultimately vindicated, it will, in all likelihood, suffer irreparable harm for which damages will not be an adequate remedy.
Lend Lease submits that there is an urgent need for this Court to deal with Lend Lease's application so as to prevent Sugar Australia from acting upon the Recourse Notice and drawing the Bank Guarantees. The urgent need arises on the basis that damages will not be an adequate remedy should Sugar Australia draw on the Recourse Notice and it ultimately be found by the Court that it had no entitlement to do so. This is said to be the case for two principal reasons, namely:
(a) in the circumstances where Sugar Australia has paid up capital of $4 (which is not disputed), where it does not own the land where the Project is being constructed (which is owned by CSR Limited and Wilmar Sugar Pty Ltd.) and where neither of the 2 companies that own its shares are guarantors of its obligations under the Construction Contract, there is a risk that Sugar Australia may dissipate the funds drawn from the Bank Guarantees and will not be in a position to meet an immediate payment of damages. Lend Lease noted that it would appear from an Agency Agreement between Sugar Australia and its undisclosed principals, in particular clause 10.2, that Sugar Australia will be required to call on an indemnity from its undisclosed principals to ensure that it is able to meet any award of damages. However, Lend Lease says that there is no evidence before the Court that the parties to that Agency Agreement, in which the indemnity is found, have agreed to indemnify and hold harmless Sugar Australia in respect of any claims that Lend Lease might hereafter make in the event the Bank Guarantee is drawn upon and Lend Lease's claims for damages in this proceeding are ultimately to be found proven. The hitherto undisclosed principals (namely, Wilmar Sugar Refining Investments Pty Ltd (‘Wilmar’) and Mackay Sugar Limited (‘Mackay’) were only bought to light on the issue of this proceeding; and
(b) it is claimed that Lend Lease will suffer reputational damage should the Bank Guarantees be drawn upon. In this regard, Lend Lease adduced evidence from the Group Treasurer that should the security issued on behalf of Lend Lease be called, it could impact adversely on Lend Lease Group's reputation and, as a result, the cost and availability of bank guarantee and performance bond facilities to the Lend Lease Group and its subsidiaries (which includes the Plaintiff, Lend Lease). The Chief Operating Officer for Lend Lease provides evidence to similar effect concerning the considerable reputational detriment that Lend Lease Group and Lend Lease will suffer should the Bank Guarantees be drawn upon.
Sugar Australia does not dispute that it has a paid up capital of $4 or that it does not own the land at 265 Whitehall Street Yarraville, Victoria where the refined sugar station is being constructed.
However, Sugar Australia submits on the evidence that Lend Lease has substantial assets. It points to the fact that Lend Lease has adduced no evidence that recourse to security will cause it substantial financial hardship or ruin.
Sugar Australia submits further that in the event that Lend Lease was successful at trial in demonstrating that it was not entitled to have recourse to some or all of the security represented by the Bank Guarantees, Lend Lease would be entitled to make the necessary cash call of the joint venture participants pursuant to the terms of the Agency Agreement and Joint Venture Agreement.
It says further that the Court would be entitled to find that the joint venture participants have more than sufficient assets to meet any judgment that Lend Lease may obtain against it in connection with the security. It points to evidence that as at 31 December 2013, the Sugar Australia Joint Venture (now only comprised by Mackay Sugar Limited (ACN 057463671) (Mackay) and Wilmar Sugar Refining Investments Pty Limited (ACN 057463671) (Wilmar)) had total current and non-current assets of $468, 164, 000. The evidence is that Mackay has a paid up capital of $16,677,093.44 and Wilmar has a paid up capital of $108,760,000.00.
In conclusion, I take the view that if there is no injunction granted but the claims of Lend Lease are ultimately vindicated, it will, in all likelihood, suffer the irreparable harm it claims for which damages will not be an adequate remedy.
Balance of Convenience
In this case I am satisfied that the balance of convenience strongly favours the grant of the injunction to preserve the status quo pending the resolution of the disputes in this proceeding.
I make this finding for 3 principal reasons:
(a) Lend Lease will in all likelihood suffer significant reputational damage should Sugar Australia cash the Bank Guarantees;
(b) there is an appreciable risk that Sugar Australia will not be able to satisfy an award of damages should Lend Lease ultimately succeed in its claims against it; and
(c) in comparison, I am not satisfied that there is likely to be more than minimal inconvenience to Sugar Australia should it be restrained from acting on the Recourse Notice pending the trial of the proceeding.
Orders
Lend Lease offers the usual undertaking as to damages. These orders are made on the giving of that undertaking.
It is ordered that: until the trial of this proceeding or further order, the Defendant, its servants and agents, are restrained from seeking recourse to the two Bank Guarantees provided by the Plaintiff in favour of the Defendant dated 28 June 2007.
Directions will be made on the application of either party as to the further case management of this proceeding, including any necessary directions as to the statement of a question relating to the proper construction of clause 5.2 of the Construction Contract for hearing and determination as a separate trial pursuant to r 47.04 of the Supreme Court (General Civil Procedure) Rules 2005.
I will hear the parties as to the costs of this application for the interlocutory injunction.
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