Lorenzin Construction P/L v Chero P/L - [2006] SADC 97

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
LORENZIN CONSTRUCTION P/L v CHERO P/L
[2006] SADC 97
Reasons for Decision of His Honour Judge Robertson
24 August 2006
EQUITY - EQUITABLE REMEDIES - INJUNCTIONS
Application for Interlocutory Injunction - contracts for civil works to be undertaken by the Plaintiff - performance Bank Guarantees provided by Plaintiff - Defendant seeking to call in Bank Guarantees - dispute regarding whether Defendant entitled to call in Bank Guarantees - Interim Injunction granted ex parte - application to continue Injunction - relevant principles - serious question to be tried - negative stipulation - manner in which it should be dealt with in exercise of discretion - damages an adequate remedy - Interim Injunction discharged.
Castlemaine Tooheys Pty Ltd v The State of South Australia (1986) 161 CLR 148; Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199; Barker v Perpetual Trustees Australia Ltd and Pioneer Homes Pty Ltd (2003) 85 SASR 263; American Cyanamid Co v Ethicon Ltd (1975) A.C. 396, applied.
Barclay Mowlem Construction Ltd v Simon Engineering (Australia) Pty Ltd (1991) NSWLR 451, distinguished.
Kilpatrick Green Pty Ltd v State Supply Board (1991) 56 SASR 591; Broken Hill Proprietary Co Ltd v Hapag-Lloyd Aktiengesellschaft (1980) 2 NSWLR 572; Maggbury Pty Ltd v Hafele Australia Pty Ltd (2002) 210 CLR 181; State Transport Authority v Apex Quarries Ltd (1988) VR 187, considered.

LORENZIN CONSTRUCTION P/L v CHERO P/L
[2006] SADC 97
Judge Robertson
Civil
Introduction

On 12 July 2006, a Judge of this Court granted the Plaintiff an Interim Injunction restraining the Defendant from seeking recourse to contract performance Bank Guarantees (“Bank Guarantees”). The Bank Guarantees were provided under the terms of two contracts for the performance of civil engineering works by the Plaintiff for the Defendant at a development called “Craigburn Farm”. At the present time, the values of the Bank Guarantees are not substantial. The hearing was ex parte. The Plaintiff now makes application to maintain and extend the Injunction until “further order”. In other words, the Plaintiff seeks to extend the Injunction until the hearing of the action. The application is opposed by the Defendant, which seeks to have the Injunction discharged.
Circumstances Leading To The Interim Injunction
Before I deal with the issues which arose during the course of the hearing, I should briefly refer to the circumstances which led to the granting of the Interim Injunction. The Defendant undertook civil construction works for the Plaintiff at its Craigburn Farm development on what was known as “Stage A1/A2” and “Stage F”. On the evidence presented at the hearing it appears that the work undertaken by the Plaintiff on StageA1/A2 was pursuant to an agreement made in September 1998. The work undertaken at Stage F appears to be pursuant to an agreement made in 1999. For the purposes of these Reasons, I will proceed on the basis that there were two separate contracts. What is important, is that both contracts included the provisions of the Australian Standard General Conditions of Contract (AS2124-1992) (“General Conditions”). It was the provisions of the General Conditions which basically regulated the contractual relations between the Plaintiff and the Defendant with respect to the works to be undertaken.
The works required to be completed by the Plaintiff under the contracts included road works and services and also the construction of an underground storm water drainage system. Whilst it is not entirely clear from the evidence, it would seem that most of the works undertaken by the Plaintiff were completed by the end of 1999, although there were some outstanding issues after that time. One of the matters in dispute, arising from the works completed by the Plaintiff, related to cracked stormwater drainage pipes. It is that dispute which has led the parties to court.
I pause in this narrative to make reference to some relevant clauses in the General Conditions. As I said, it was these General Conditions which formed the basis of the contract for each stage. Clause 23 of the General Conditions required the Defendant to ensure that throughout the period of the contracts there was a Superintendent appointed. The Superintendent was required to exercise certain functions and responsibilities provided in the General Conditions. In broad terms, the Superintendent, as an independent party, was to manage and supervise the works to be undertaken.
Clause 42.1 of the General Conditions, in part, gives power to the Superintendent to issue Certificates requiring either the Principal or the Contractor named in the General Conditions, in this case the Defendant and the Plaintiff respectively, to make a payment of money to the other.
Clause 5.5 provides, in part, that a party may convert into money any security provided under the General Conditions, where the party has become entitled to exercise a right to a security and it has given the appropriate notice to the other party of its intention to exercise that right.
It is not disputed that the Bank Guarantees are securities within the meaning of Clause 5 and that the Defendant has given the appropriate notice under the Clause. What is in dispute is whether the right to convert the Bank Guarantees has arisen. It will be seen shortly that the main issue raised by the Plaintiff is whether a Certificate of Payment issued by Maunsell Australia Pty Ltd (“Maunsell Australia”) purporting to act as Superintendent is valid.
From about October 2001, Maunsell Australia purported to act as the Superintendent under the General Conditions. I say, “purported”, because the central issue in the dispute in these proceedings is whether Maunsell Australia was properly appointed as the Superintendent pursuant to the terms of the General Conditions. I will return to this issue later. Although there is currently a dispute regarding whether Maunsell Australia was properly appointed as Superintendent from about October 2001, during the period from October 2001 onwards the Defendant, Maunsell Australia and the Plaintiff operated on the basis that, in fact, Maunsell Australia was the Superintendent.
By a letter dated 21 December 2004, Maunsell Australia required the Defendant to undertake what it described as “remedial work” relating to the cracked stormwater pipes. It required the work to be commenced in January 2005 and completed by 28 February 2005. In the letter the Plaintiff was also notified that if the work was not commenced within the time specified, then Maunsell Australia understood that the Defendant intended to have the work carried out by others and the cost of having that work carried out would be claimed as a debt due from the Plaintiff to the Defendant.
By a letter dated 24 December 2004, the Plaintiff denied it had any contractual responsibility to carry out the work required to be completed by Maunsell Australia and denied that Maunsell Australia had any right to give such a direction at that point in time. On 17 January 2005, Maunsell Australia rejected the Plaintiff’s claim that it had no contractual responsibility to carry out the work and gave notice that the Defendant intended to have the work carried out by other persons and that the cost of that work would be treated as a debt due from the Plaintiff to the Defendant. The Plaintiff responded with a letter to the Defendant dated February 2005, in which it gave notice of a dispute pursuant to Clause 47 of the General Conditions.
It appears that the work required by Maunsell Australia to be completed by the Defendant was undertaken by other contractors. On 31 May 2006, Maunsell Australia, purporting to act as the Superintendent, issued Payment Certificate No.13, in which it certified payment of the sum of $333,002.54 was to be paid by the Plaintiff to the Defendant for the cost of completing the works. (“Certificate 13”). In a letter dated 9 June 2006, Maunsell Australia forwarded Certificate 13 to the Plaintiff with a request that it make payment directly to the Defendant. It is the issue of this Certificate, which is the main focus of the current proceedings. However, the wider dispute between the parties involves the issue of whether the Plaintiff is liable to the Defendant for the costs of the stormwater pipe works. This dispute, as I mentioned earlier, is the subject of the Notice of Dispute given by the Plaintiff in February 2005.
On receiving Certificate 13, the Plaintiff wrote to Maunsell Australia, by letter dated 23 June 2006, stating that it considered the Certificate to be a nullity, and of no effect, and referring Maunsell Australia to its Notice of Dispute contained in the letter of 15 February 2005. On 5 July 2006, the Defendant wrote to the Plaintiff, in which it referred to Certificate 13 and the fact that it had not received payment from the Defendant as required by that Certificate. The Defendant indicated that as a result of not receiving payment, it proposed to have recourse to the Bank Guarantees provided by the Defendant as securities. It was this letter which precipitated the Plaintiff filing an ex parte application which resulted in it obtaining the Interim Injunction.
Following the granting of the Interim Injunction, the Plaintiff filed a Summons seeking various Declarations. Included in the Declarations sought is a Declaration that Certificate 13 is not a Payment Certificate for the purpose of the General Conditions for Stage A1/A2 and a Declaration that Certificate 13 is not a Payment Certificate for the purpose of the General Conditions with respect to Stage F. Furthermore, with respect to both Stages, the Plaintiff seeks Declarations that, with respect to the General Conditions for both Stages, that the Defendant is not entitled to call up the Bank Guarantees.
Legal Principles
I turn briefly to consider the principles upon which the application for an Interlocutory Injunction is to be considered. Those principles are stated by Mason ACJ in Castlemaine Tooheys Pty Ltd v The State of South Australia (1986) 161 CLR 148 (at 153):
The principles governing the grant or refusal of interlocutory injunctions in private law litigation have been applied in public law cases, including constitutional cases, notwithstanding that different factors arise for consideration. In order to secure such an injunction the plaintiff must show (1) that there is a serious question to be tried or that the plaintiff has made out a prima facie case, in the sense that if the evidence remains as it is there is a probability that at the trial of the action the plaintiff will be held entitled to relief; (2) that he will suffer irreparable injury for which damages will not be an adequate compensation unless an injunction is granted; and (3) that the balance of convenience favours the granting of an injunction.
This statement of the principles has been reaffirmed by Gleeson CJ in Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199 at 217-218. (See also: Barker v Perpetual Trustees Australia Ltd and Pioneer Homes Pty Ltd (2003) 85 SASR 263 at 274-275).
In many cases, since Castlemaine Tooheys, Courts have considered the issue of the granting of an Interlocutory Injunction to be a two-stage process, namely, first, is there a serious question to be tried and, secondly, whether the balance of convenience favours the granting of the Injunction. Courts have considered the question of whether the party seeking the injunction will suffer irreparable injury for which damages will not be adequate compensation in the context of the balance of convenience. An example of this approach is found in the decision of Kilpatrick Green Pty Ltd v State Supply Board (1991) 56 SASR 591, in which King CJ (at 594) considered the question of the risk of the Plaintiff suffering irremedial damage in the context of considering the balance of convenience.
Serious Question To Be Tried
As I mentioned, the front line of the Plaintiff’s case is that Certificate 13 has no force or validity because it was issued by Maunsell Australia, who was not the properly appointed Superintendent with respect to each of the General Conditions. In Clause 2 of the General Conditions “Superintendent” is defined as:
“Superintendent” means the person stated in the Annexure as the Superintendent or other person from time to time appointed in writing by the Principal to be the superintendent and notified as such in writing to the Contractor by the Principal …
The reference to the “Principal” is a reference to the Defendant. The reference to “Contractor” is a reference to the Plaintiff.
The original Superintendent appointed was Wallbridge & Gilbert, Consulting Engineers. Later, Wallbridge & Gilbert were replaced by Maunsell McIntyre Pty Ltd. As I said, it appears that Maunsell Australia, the issuer of Certificate 13, commenced to act as the “Superintendent” in about October 2001. The evidence indicates that whilst Maunsell McIntyre and Maunsell Australia are associated, they are separate companies and thus separate legal entities.
It is not asserted by the Defendant that it gave the Plaintiff notice pursuant to the terms of the definition of “Superintendent” in Clause 2.1, of any change of the Superintendent from Maunsell McIntyre to Maunsell Australia. Mr Ian Marker, in an Affidavit sworn on 7 August 2006, deposed that in late 2001, as a result of a corporate restructure of the Maunsell Group of Companies, the Superintendent changed from Maunsell McIntyre to Maunsell Australia. A letter dated 2 October 2001, designed to be distributed to clients of Maunsell Australia, was exhibited to Mr Marker’s Affidavit. In that letter it stated that, “Maunsell McIntyre Pty Ltd is now Maunsell Australia Pty Ltd”. In Paragraph 14 of his Affidavit, Mr Marker said that this letter was sent to Lorenzin Constructions Pty Ltd. Mr Lorenzin has deposed to having no recollection of receiving it.
What is clear, and which is accepted by the Defendant, is that Maunsell McIntyre Pty Ltd did not simply change its name to Maunsell Australia Pty Ltd, as the letter of 2 October 2001, on one view, might suggest. Mr Hoffman QC, Counsel for the Defendant, acknowledged that they are separate companies.
The obligation, pursuant to the General Conditions, was for the Defendant to give notice to the Plaintiff of any new appointment of a Superintendent. As I said, it is not asserted by the Defendant that it did give such a notice with respect to Maunsell Australia. The letter of 2 October 2001, from Maunsell Australia, does not fulfil the obligation of the Defendant to give such notice.
In my opinion, there is a serious question to be tried on this issue. On the face of it, there is no notice to the Plaintiff of the appointment of Maunsell Australia as the Superintendent. This brings into question the validity of Certificate 13 as it has been issued by Maunsell Australia. It is upon that Certificate that the Defendant relies to call in the Bank Guarantees. The Plaintiff argues that if Maunsell Australia had no power to issue the Certificate, then the Defendant cannot rely upon the terms of Clause 5.5 to call in the Bank Guarantees.
I acknowledge there are possibly other factors which may come into consideration in finally determining whether Maunsell Australia was or was not the Superintendent at the time of the issue of Certificate 13 and at the time it wrote to the Plaintiff on 21 December 2004, requesting the Plaintiff to undertake the remedial work. One such factor is that in 2002, and onwards, the Plaintiff, the Defendant and Maunsell Australia appear to have conducted their relationship as if Maunsell Australia was the Superintendent. Whether that will have any bearing on the outcome of the issue of whether Certificate 13 is valid will only be determined when all of the evidence is presented at Trial. However, the fact is that there is no evidence of an appropriate notice given to the Plaintiff by the Defendant, of the appointment of Maunsell Australia as the Superintendent. The absence of the notice sets the foundation for a serious question to be tried. As I said, the question which follows is whether the Defendant can validly rely upon Certificate 13, to call in the Bank Guarantees under clause 5.5 of the General Conditions.
There were a number of other matters which were argued regarding the issue of a serious question to be tried. One such matter was whether Certificate 13 was valid because it appeared to confine itself to the General Conditions relating to Stage A1/A2, when the remedial works to which the Certificate related involved not only Stage A1/A2, but also Stage F. On the face of the Certificate, it does appear that it is directed only to the contract relating to Stage A1/A2. In my view, there is also a serious question to be tried in relation to this issue.
I do not intend to canvas the other arguments presented by the Plaintiff on the issue of a serious question to be tried. As I have stated, I am satisfied that there is a serious question to be tried, namely, whether there is a valid basis to entitle the Defendant to call in the Bank Guarantees.
I propose to now turn to consider the balance of convenience. It is within the context of the balance of convenience that I will consider the question of whether the Plaintiff will suffer irreparable injury for which damages will not be an adequate compensation unless the Injunction is maintained.
Balance Of Convenience
The seminal expression of principle regarding the balance of convenience is that of Lord Diplock in American Cyanamid Co v Ethicon Ltd (1975) A.C. 396. The principles expressed by Lord Diplock have been adopted and followed both in Australia and the United Kingdom. Lord Diplock said, (at p 406):
My Lords, when an application for an interlocutory injunction to restrain a defendant from doing acts alleged to be in violation of the plaintiff’s legal right is made upon contested facts, the decision whether or not to grant an interlocutory injunction has to be taken at a time when ex hypothesi the existence of the right or the violation of it, or both, is uncertain and will remain uncertain until final judgment is given in the action. It was to mitigate the risk of injustice to the plaintiff during the period before that uncertainty could be resolved that the practice arose of granting him relief by way of interlocutory injunction; but since the middle of the 19^th century this has been made subject to his undertaking to pay damages to the defendant for any loss sustained by reason of the injunction if it should be held at the trial that the plaintiff had not been entitled to restrain the defendant from doing what he was threatening to do. The object of the interlocutory injunction is to protect the plaintiff against injury by violation of his right for which he could not be adequately compensated in damages recoverable in the action if the uncertainty were resolved in his favour at the trial; but the plaintiff’s need for such protection must be weighed against the corresponding need of the defendant to be protected against injury resulting from his having been prevented from exercising his own legal rights for which he could not be adequately compensated under the plaintiff’s undertaking in damages if the uncertainty were resolved in the defendant’s favour at the trial. The court must weigh one need against another and determine where “the balance of convenience” lies. (Emphasis added).

Mr Jenner, Counsel for the Plaintiff, submitted that Clause 5.5 of the General Conditions was a negative covenant. He submitted that the law in Australia is that a court “should lean against refusing on discretionary grounds an injunction to restrain the breach of a negative stipulation”. It was his submission that a negative stipulation in a contract falls into a special category when considering the granting of an Injunction and that whilst accepting that the Court retains its discretion, as I said, he submitted that it should favour the granting of the Injunction. He relied on a number of authorities, including Broken Hill Proprietary Co Ltd v Hapag-Lloyd Aktiengesellschaft (1980) 2 NSWLR 572; Maggbury Pty Ltd v Hafele Australia Pty Ltd (2002) 210 CLR 181 (per Callanan J at pp 219-220).
For the purpose of these Reasons I am prepared to accept that Clause 5.5 is, in substance, a negative stipulation or covenant. However, I do not accept, as a general proposition, that where an injunction is sought to protect the possible breach of a negative covenant or stipulation, that a court will lean against refusing such an injunction on discretionary grounds. In the court’s exercise of its discretion, when considering the balance of convenience, there may be circumstances where considerable weight is placed upon the fact that it is the breach of a negative covenant that is being sought to be prevented. However, this is not the same as stating that a party seeking an injunction, to protect the possible breach of a negative covenant, starts from a relative position of strength, in the exercise of the discretion, from that fact alone. It is important that the general discretion in the court remains completely unfettered. In this case, I see no reason why the court should lean against refusing an injunction in the exercise of its discretion. In my opinion, the case falls for decision relying on the principles in Castlemaine Tooheys and within those principles exercising its discretion completely unfettered.
Whilst these proceedings are confined to the seeking of relief by the Plaintiff by way of Declarations relevant to Certificate 13 and its validity and Declarations that the Defendant is not entitled to exercise its right under the General Conditions to call in the Bank Guarantees, it is important that the proceedings be seen in the wider context. That wider context is the issue regarding whether the stormwater drain works were appropriately remedial works and whether the Plaintiff was contractually obliged to complete those works. If the Plaintiff was obliged to complete those works, then it is in breach of the contracts and will be liable for the costs of completion of the works by the other contractors. This liability is a separate question to whether it has a liability arising from Certificate 13.
If the Injunction is not maintained, then the Defendant will call in the moneys represented by the Bank Guarantees. It may not be entitled to do this legally, for two reasons. The first, being that Certificate 13, upon which it relies, may not be a legitimate basis for the calling in of the Guarantees. The second is that the underlying basis of the issue of Certificate 13 may not exist because the Plaintiff was not contractually obliged to complete the stormwater drain works, to which Certificate 13 relates. In the first case, if Certificate 13 was not a valid Certificate because Maunsell Australia was not the Superintendent, or for other defects with the Certificate, but in the end the Defendant was liable to pay the costs of the stormwater drain works, then no harm would be done. The moneys represented by the Bank Guarantees would have been applied towards the Plaintiff’s debt to the Defendant. However, if the underlying basis of the Certificate was not valid because the Plaintiff was not contractually obliged to complete the works, then the Defendant has received moneys, through the Bank Guarantees, to which it was not entitled. The Plaintiff would be entitled to recover those moneys from the Defendant. It is not suggested that the Defendant does not have the financial capacity to repay these moneys if it proceeds to call in the Bank Guarantees.
In the end, if the Defendant is permitted to call in the Bank Guarantees and receive the moneys represented by them, then damages is an adequate remedy for the Plaintiff if the Defendant has wrongfully obtained those moneys. In reaching that conclusion, it follows that the Plaintiff has not established that it would suffer irreparable injury for which damages will not be an adequate compensation unless the Injunction is maintained.
Counsel for the Plaintiff could not point to any other detriment that the Plaintiff may suffer if the Defendant is permitted to call up the Bank Guarantees. In those circumstances, I am of the opinion that the balance of convenience lies with the Defendant. Accordingly, the Interim Injunction should not stand.
In his submissions on the question of the balance of convenience, Counsel for the Plaintiff relied upon the decision of Barclay Mowlem Construction Ltd v Simon Engineering (Australia) Pty Ltd (1991) NSWLR 451. This was a case in which an interlocutory injunction was sought to restrain the calling in of a performance bond given under a building contract. To that extent, the issue was similar to the present circumstances. However, it was common ground that the entitlement to the bond had not, at that point, arisen. An interlocutory injunction was granted. I do not propose to deal with his reasons as I consider the case distinguishable from the present circumstances, as it was held that damages would not provide an adequate remedy if an interlocutory injunction was not granted.
There are some judicial observations to suggest that the question is not whether damages would provide an adequate remedy, but whether it is just to confine a party to the remedy in damages. In State Transport Authority v Apex Quarries Ltd (1988) VR 187, Kaye J (at 193) said:
It was contended on behalf of the defendant that the plaintiff could accept its repudiation and sue for damages.
The proper test in these circumstances is not whether damages would provide the plaintiff with an adequate remedy, but rather the test is as was formulated by Sachs L.J. in Evans Marshall & Co. Ltd. v. Bertola S.A. [1973] 1 W.L.R. 349 at p.379 and approved and adopted in City of Melbourne v. Hamas Pty. Ltd. (unreported, 20 February 1987) by Tadgell J.: “Is it just, in all the circumstances, that a plaintiff should be confined to his remedy in damages?”.
At first blush this statement of principle would appear to be in conflict with the observations of Mason ACJ in Castlemaine Tooheys. However, even if it is accepted that the test is whether it is just that the Plaintiff be confined to its remedy in damages, I would still reach the same conclusion. In my view, it is just in the circumstances of this case that the Plaintiff be confined to its remedy in damages.
Finally, I should add, that even if the question of irreparable injury for which damages will not be adequate compensation needs to be considered separately from the question of the balance of convenience, as is set out in the passage cited from Mason ACJ in Castlemaine Tooheys, the result is still the same. As I said, the Plaintiff has not established it would suffer irreparable injury for which damages will not be adequate compensation.
Before I conclude these Reasons, I should mention that Mr Hoffman QC submitted that the injunction should, in any event, be discharged because it had been obtained ex parte in circumstances where there had been non-disclosure of material matters to the Court which granted the Interim Injunction. The Plaintiff denied that it had failed to disclose any material matter. In view of the decision I have reached to discharge the Interim Injunction, there is no necessity to deal with this issue.
The Interim Injunction is discharged. I will hear the parties on the question of costs.