Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S APCI 2014 0129

SUGAR AUSTRALIA PTY LTD (ACN 081 245 169)	Appellant
v
LEND LEASE SERVICES PTY LTD (ACN 081 540 847)	Respondent

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JUDGES:	OSBORN, FERGUSON & KAYE JJA
WHERE HELD:	MELBOURNE
DATE OF HEARING:	23 April 2015
DATE OF JUDGMENT:	13 May 2015
MEDIUM NEUTRAL CITATION:	[2015] VSCA 98
JUDGMENT APPEALED FROM:	Lend Lease Pty Ltd v Sugar Australia Pty Ltd [2014] VSC 476

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BUILDING CONTRACTS – Bank performance security – Security for claims by proprietor acting reasonably – Application by contractor for interlocutory injunction to restrain recourse to security – Construction of security clause – Whether serious issue whether proprietor acting reasonably in seeking recourse to security – Whether serious issue to be tried as to validity of recourse notice – Balance of convenience.

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APPEARANCES:	Counsel	Solicitors
For the Appellant	Mr F Corsaro SC with Mr D McAndrew	Thomson Geer
For the Respondent	Mr P J Jopling QC with Mr D J Fahey	King & Wood Mallesons

OSBORN JA:

FERGUSON JA:

This is an appeal against a decision to grant an interlocutory injunction restraining recourse to two bank guarantees provided by way of performance bonds[1] by a builder to an owner under a building contract.
[1]As to the appropriate nomenclature — see the observations of Barwick CJ in Wood Hall Limited v Pipeline Authority (1979) 141 CLR 443, 445 and by Young J in Hortico (Aust) Pty Ltd v Energy Equipment Co (Aust) Pty Ltd (1985) 1 NSWLR 545, 549-51 (‘Hortico’).

The facts of the matter are set out fully in the judgment of Kaye JA, which we have had the considerable advantage of reading in draft. It is unnecessary to repeat them in detail for the purpose of our reasons.

We agree with Kaye JA’s conclusions that the appeal should be allowed and the injunction should be set aside. We also agree with his Honour’s reasons subject only to the following matters.

In 2007, by an agreement in writing substantially adopting a standard form contract, the respondent agreed to design, construct, supply and install a new refined sugar plant at premises in Yarraville for an adjusted contract price of $42,485,189 excluding GST. The agreement required the respondent to provide the appellant with security in the form of two unconditional bank guarantees for an amount representing five per cent of the original contract sum, being $4,190,000 in aggregate.

The security was required to be provided in accordance with the form and terms of a pro forma ‘unconditional undertaking’ contained in an annexure to the agreement. On 26 June 2007, the respondent provided in the required form two unconditional undertakings from a bank in the sums required.

General condition 5.2 (‘GC 5.2’) of the agreement governed the availability of recourse to the security provided as follows:

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 monies or an indemnity by the Contractor under or in consequence of or in connection with the Contract;
(ii)reimbursement of any monies paid to others under or in connection with the Contract; or
(iii)other monies 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 five 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.

For the reasons explained by Kaye JA, dispute arose between the parties during the performance of the contract works. In September 2011, the respondent purported to terminate the contract pursuant to its conditions, and in November 2011, the appellant also purported to terminate the contract pursuant to its conditions.

On 8 August 2014, the appellant gave written notice to the respondent of its intention to have recourse to the bank guarantees (‘the recourse notice’).

On the same day, the appellant commenced proceedings in the Technology Engineering and Construction List of this Court claiming damages totalling $9,443,291.

On 12 August 2014, the respondent independently commenced its own proceeding in this Court claiming $17,904,746, by way of sums allegedly due under the agreement together with $67,171,483 by way of damages for project losses.

The respondent also sought declarations that the appellant had wrongfully purported to issue the recourse notice in respect of the bank guarantees and that the recourse notice was invalid. It also sought a permanent injunction restraining the appellant from having recourse to the bank guarantees.

By summons dated 12 August 2014, the respondent applied for an interlocutory injunction to restrain the appellant from having recourse to the bank guarantees. The application was heard on 29 August 2014 and the injunction was granted on 24 September 2014. The primary judge restrained the appellant from having recourse to the bank guarantees before the trial of the action or further order.

The threshold issue

On return of the summons seeking an injunction, the respondent contended in the first instance that the appellant had no entitlement under the contract to seek recourse to the bank guarantees, amongst other things because it was not acting reasonably in claiming to be so entitled as GC 5.2 requires. It further contended that the appellant’s recourse notice was invalid and that should the appellant have recourse to the bank guarantees, the respondent would suffer significant commercial and reputational damage in the building industry.

In turn, the appellant submitted in the first instance that the primary judge should construe and finally determine the meaning of GC 5.2, and that, upon its proper construction, the claim to the bank guarantees fell within GC 5.2 because the appellant was in the relevant sense acting reasonably in making that claim.

The respondent did not submit to the primary judge that the Court should not construe GC 5.2 but simply joined issue as to its application in the circumstances of the case. In effect, it treated the question of whether the appellant had acted reasonably as a question of fact.

Ultimately, the primary judge declined to construe GC 5.2 and, in particular, the meaning of the phrase ‘acting reasonably’. His Honour further concluded that he should proceed on the basis that the construction of that condition raised a serious issue to be tried at a future date. It is with this threshold decision that our judgment is concerned.

His Honour reached the conclusion that he should not construe GC 5.2 in reliance upon the following considerations:

(a) the difficulties raised by the construction question;

(b) the general importance of the form of contract utilised by the parties and the ‘potential for ongoing precedent effect’ of a final construction of GC 5.2;

(c) the limited time available to the Court; and

(d) the degree of hardship arising from the scale of the monetary sums involved.[2]

[2]Lend Lease Pty Ltd v Sugar Australia Pty Ltd [2014] VSC 476 [33] (‘Reasons’).

Although it cannot be said that it is always the duty of a court on an interlocutory application to decide a question of law upon which the decision of the case depends,[3] more often than not performance bonds stand in a separate category. In our view, his Honour’s reasoning demonstrates that he did not give adequate weight to the essential character and evident commercial purpose of GC 5.2 as agreed by the parties. Conversely, on examination, the circumstances identified by his Honour are of insufficient weight to justify postponement of the question of construction. Furthermore, it was necessary to construe GC 5.2 in order to identify the criteria by reference to which to assess the respondent’s submission that on the facts the appellant had no entitlement under the contract to seek recourse to the bank guarantees.
[3]Cohen v Peko-Wallsend Ltd (1986) 61 ALJR 57, 59 (Gibbs CJ, Mason and Wilson JJ).

The evident commercial purpose of GC 5.2

In Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd,[4] Charles and Callaway JJA addressed the commercial purposes of contractual provisions of the type in issue.

[4][1998] 3 VR 812 (‘Fletcher’).

Callaway JA observed:

There are broadly two reasons why the beneficiary may have stipulated for a guarantee. One is to provide security. If it has a valid claim and there are difficulties about recovering from the party in default, it has recourse against the bank. The second reason, which is additional to the first, is to allocate the risk as to who shall be out of pocket pending resolution of a dispute. The beneficiary is then able to call upon the guarantee even if it turns out, in the end, that the other party was not in default.[5] It is a question of construction of the underlying contract whether the guarantee is provided solely by way of security or also as a risk allocation device. Remembering that we are speaking of guarantees in the sense of standby letters of credit, performance bonds, guarantees in lieu of retention moneys and the like, the latter purpose is often present and commercial practice plays a large part in construing the contract.[6]

[5]Compare Burleigh Forest Estate Management Pty Ltd v Cigna Insurance Australia Ltd [1992] 2 Qd. R 54, 59 and Themehelp Ltd v West [1996] QB 84 in the dissenting judgment of Evans LJ at 103.

[6]Fletcher [1998] 3 VR 812, 826-7 (citation in original).

If a provision in a building contract requiring a performance bond is intended to operate as a risk allocation device pending the final determination of the dispute between the parties then that intention must be fundamental to a consideration of the justice of an application made to restrain recourse to such a bond pending final determination of the dispute.

Charles JA identified the relevant issue of construction as follows:

The critical question which this court must decide is whether the relevant commercial purpose of the agreement was to provide security to Varnsdorf, so that a valid claim to damages (whether or not Time Damages) would be secured or whether clauses such as 3.13 made provision for an allocation of the risk between Fletcher and Varnsdorf — showing which party was to be out of pocket pending resolution of any dispute. If the contractual intention of the parties was the first of these alternatives, cl. 3.13 would give Varnsdorf no authority to call on the letters of credit pending resolution of any dispute. On the other hand, if the second alternative were to be preferred, a question would remain whether there was any relevant qualification or prohibition affecting Varnsdorf’s ability now to call on the security. In my view the terms of the agreement show that the commercial purpose of this agreement was to provide an allocation of risk and that Varnsdorf is entitled, under cl. 3.13, to call on the security provided by Fletcher notwithstanding that there is a genuine dispute and a serious issue to be tried as to whether Handover has been reached.[7]

[7]Ibid 821.

Fletcher[8] was considered and applied by the Full Court of the Federal Court in Clough Engineering Ltd v Oil & Natural Gas Corporation Ltd [No 3].[9] The Court accepted that the commercial context of provisions of the type in issue must inform their construction. In turn, a critical question of construction is whether the provision is intended to allocate risk prior to the final determination of rights. In this regard, the Court said:[10]

… subject to the exceptions of fraud and unconscionability, the beneficiary of a performance guarantee granted in its favour as a risk allocation device, will be entitled to call upon the guarantee even if it turns out, ultimately that the other party was not in default.[11]

[8][1998] 3 VR 812.

[9](2008) 249 ALR 458 (‘Clough’).

[10]Ibid 479 [80] (citation in original).

[11]Fletcher [1998] 3 VR 812, 827.

In Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd,[12] the New South Wales Court of Appeal considered the decision in Clough.[13] Although Macfarlan JA, with whom Campbell JA agreed, doubted the correctness of the decision in Clough on the facts,[14] he did not doubt that a performance bond may be intended to serve both of the purposes identified in Fletcher.[15]
[12][2010] NSWCA 283.
[13](2008) 249 ALR 458.
[14]Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd [2010] NSWCA 283 [43].
[15]Ibid [39]-[42].

The fact that a performance bond is intended to operate as a risk allocation device is not, of course, necessarily determinative of the right of a party to have recourse to it. It may be subject to a contractual qualification or limitation upon the circumstances in which recourse may be had. Nevertheless, the fundamental characteristic of a risk allocation device informs the task which the Court must undertake in resolving whether or not to grant an injunction.

The primary judge recognised that the relevant contractual provision in the present case might have one or both of the purposes postulated in Fletcher.[16] His Honour also recognised that the Court should not readily favour a construction which erodes or frustrates the commercial purpose of the provision of a security.[17] He ultimately put the construction issues in the present case as follows:

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.[18]

[16]Reasons [35].

[17]Reasons [36].

[18]Reasons [41].

He further referred to the statement of the Full Federal Court in Clough:

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. [19]

[19]Clough (2008) 249 ALR 458, 480 [85] (citation omitted).

The primary judge correctly encapsulated the principles governing the construction issues raised by the application before him but the obvious question raised by these principles is whether his Honour should have gone on to construe GC 5.2 in order to resolve first, whether the contractual provisions were intended to operate as a risk allocation device and secondly, what was the nature of the qualification imposed upon recourse to it by GC 5.2.

We respectfully agree with the view expressed by Charles and Callaway JJA in Fletcher[20] that in the first instance in a case such as the present the Court must ask whether the performance bond is intended to allocate risk pending the final determination of the parties’ rights. If GC 5.2 is intended to operate in part as a risk allocation provision, the failure to resolve its construction until trial renders it effectively nugatory in this respect and defeats its evident commercial purpose. In substance, it deprives the parties of the commercial bargain that they made. The consequence of the grant of an injunction restraining recourse to a performance bond pending trial in these circumstances is that it will in effect amount to final relief in respect of a principal benefit intended to be conveyed by the performance bond. It is well recognised that where an injunction in effect grants final relief that consequence must bear upon the fundamental question of whether the grant or refusal of the injunction carries with it the lower risk of injustice.
[20][1998] 3 VR 812.

In this sense, consideration of the commercial purpose of the performance bond in issue squarely reflects the application of the general principles governing the enforcement by injunction of negative stipulations within contracts. After identifying the construction issue in the terms which we have quoted above, the primary judge went on to say:

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.[21]

[21]Reasons [43].

Whilst it may be accepted that the usual principles governing interlocutory injunctions fell to be applied in the present case, it must also be accepted that they fell to be applied in respect of an unusual form of contract, if it be the case that the commercial purpose of the performance bond was to allocate risk pending final determination of the dispute. Such a contractual provision fundamentally alters the context in which the Court must exercise its discretion by changing the complexion of the status quo and raising the prospect of substantial injustice if the purpose of the provision is defeated. That is, the status quo in such circumstances becomes what the parties have agreed as to which of them should bear the financial risk pending final determination, not the continuation of where that risk would naturally fall in the absence of a performance bond to call upon.

The context in which an injunction is sought will govern the extent to which a plaintiff must make out its case in order to obtain relief. In Magna Alloys and Research Pty Ltd v Coffey[22] the Full Court of this Court adopted the following passage from the judgment of Lush J in Slater Walker Superannuation Pty Ltd v Great Boulder Gold Mines Ltd[23]:

The weight to be given to the various considerations shown by the authorities to be relevant will vary from case to case … There will be situations in which the plaintiff cannot expect to be granted an injunction unless he can show that he can prove positively the existence of his rights and the infringement of them. There will be other situations in which though the plaintiff’s proof of his rights or the infringement of them is not strong, an injunction may be granted because to withhold it would do the plaintiff irreparable harm, while to grant it would not greatly injure the defendant. The possible variety of situations is unlimited.[24]

[22][1981] VR 23, 28.

[23][1979] VR 107.

[24]Ibid 110.

If the grant of injunctive relief is effectively dispositive of a material part of the claim the plaintiff must confront a heavy onus. In NWL v Woods, Lord Diplock said that where:

… the grant or refusal of the interlocutory injunction will have the practical effect of putting an end to the action because the harm that will have been already caused to the losing party by its grant or its refusal is complete and of a kind for which money cannot constitute any worthwhile recompense, the degree of likelihood that the plaintiff would have succeeded in establishing his right to an injunction if the action had gone to trial, is a factor to be brought into the balance by the judge in weighing the risks that injustice may result from his deciding the application one way rather than the other.[25]

[25][1979] 1 WLR 1294, 1306.

If the commercial purpose of a contractual provision is defeated that must bear squarely on the ultimate risk of injustice inherent in the grant of an injunction. In Bradto Pty Ltd v State of Victoria,[26] the Court of Appeal constituted by Maxwell P and Charles JA applied the following statement of fundamental principle by Hoffman J in Films Rover International Ltd v Cannon Films Sales Ltd:

… The principal dilemma about the grant of interlocutory injunctions, whether prohibitory or mandatory, is that there is by definition a risk that the court may make the ‘wrong’ decision, in the sense of granting an injunction to a party who fails to establish his right at the trial (or would fail if there was a trial) or alternatively, in failing to grant an injunction to a party who succeeds (or would succeed) at trial. A fundamental principle is therefore that the court should take whichever course appears to carry the lower risk of injustice if it should turn out to have been ‘wrong’ in the sense I have described …[27]

[26](2006) 15 VR 65, 70 [26].

[27][1987] 1 WLR 670.

When each of the above statements of underlying principle is applied to the facts of the present case it supports the conclusion that the question of whether GC 5.2 was intended in part to effect risk allocation pending resolution of a dispute must necessarily bear upon the justice or injustice of the injunction sought. The interlocutory relief sought had the capacity to amount to final relief in the sense of completely defeating the commercial purpose of risk allocation prior to the final determination of the matter.

It follows that both basic principle and the specific authority of the decision in Fletcher[28] supported the conclusion that the judge at first instance and this Court on appeal must consider whether GC 5.2 was intended to effect an allocation of risk pending resolution of the dispute between the parties.
[28][1998] 3 VR 812.

The qualification imposed by GC 5.2 upon recourse to the performance bonds relevantly required only that a claim be made by the appellant acting reasonably, not that it ultimately be judged objectively valid.

In turn, the condition allocated to the respondent the risk that such a claim might not ultimately be sustained against the respondent. If the evident commercial purpose of the provision was to be given effect, the judge was bound to construe it at least on a provisional basis. If he did not, then the risk allocation purpose of the clause was potentially defeated.

The need to construe the clause in order to assess the evidence

The respondent identifies two construction questions arising in relation to GC 5.2. The first is that to which we have already referred, namely, the meaning of the phrase ‘acting reasonably’. The appellant contends that this involved a subjective concept, whereas the respondent contends that it establishes an objective requirement.

The second question is whether GC 5.2 only permits the appellant to have recourse to the performance bonds for reimbursement of moneys presently due or expended by the appellant or whether, on the other hand, recourse might be had in respect of moneys payable in the future.

The primary judge explicitly recognised the significance of the first of the construction issues to the exercise of the Court’s discretion:

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.[29]

[29]Reasons [64] (emphasis added).

His Honour was correct to so conclude and this consideration also strongly supported the conclusion that the words ‘acting reasonably’ should be construed for the purpose of deciding whether injunctive relief was appropriate. Without so doing, the question of whether there was a serious question to be tried on the facts as to whether the appellant was entitled to seek recourse to the bank guarantees could not be determined.

The ordinary practice of the courts

The practice adopted in the reported cases relating to performance bonds to which the primary judge was referred in argument also supports the view that it is ordinarily appropriate to resolve construction issues which are capable of resolution at the interlocutory stage and which bear squarely on the justice of preventing reliance upon a performance bond pending trial.

It was submitted to the primary judge on behalf of the appellant that a central issue in the proceeding was the construction of the relevant contract and that because this did not depend 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.[30]
[30]Reasons [18].

That submission placed reliance upon the dissenting decision of Young JA in Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd.[31] In that case, the majority overturned the grant of an interlocutory injunction because the primary judge misconstrued a contractual condition governing recourse to a performance bond.[32] Further, it was in this context that Young JA made the following statement:

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 the 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.[33]

[31][2010] NSWCA 283.

[32]Ibid [25], [51] (Macfarlan JA, with whom Campbell JA agreed).

[33]Ibid [73].

Whilst the primary judge was correct to conclude first that this statement was obiter, and secondly, that it cannot be understood as stating an inflexible rule, the approach of all three judges in the case demonstrates the centrality of the construction of the contract in disputes over breach of negative conditions qualifying performance bonds and the necessity, in the ordinary course, to resolve construction issues of the type here in issue.

Reference was also made to Fletcher[34] itself in which a subsidiary issue of contractual construction also arose. In that case, a builder gave standby letters of credit to an owner to secure performance under a building contract. The contract provided that if the builder did not complete by a certain date, the owner was entitled to ‘time damages’. Upon failure by the builder to complete by the date specified, the owner gave notice of its intention to claim time damages and draw on the letters of credit. The builder sought an injunction restraining recourse to the letters of credit contending that on the proper construction of the contract, resort to the security was subject to the qualification that the claim to time damages be undisputed.
[34][1998] 3 VR 812.

In the present case, the appellant placed specific reliance upon the following statement by Charles JA:[35]

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.[36]

[35]Ibid 821 (emphasis added; citations in original).

[36]Compare Hortico (1985) 1 NSWLR 545, 549, 554; Spry, Principles of Equitable Remedies (Lawbook, 5^th ed, 1997) 466-7.

Charles JA referred, in turn, to the decision of Young J in Hortico[37], a case concerning an application for an interlocutory injunction restraining enforcement of a performance bond given by an owner with respect to payment for the design, supply and installation of a boiler. A central issue in that case was whether the bank guarantee in issue was independent of the works contract. Young J said:

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.[38] 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,[39] 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.
Accordingly, although some of the issues in this case such as whether time is of the essence of the contract and who breached the contract may involve facts which are not yet available and should not be decided at this stage, the basic legal issues in the case can and should be decided now. These issues are whether the ‘guarantee’ given by the bank should be read independently of the contract or as part of the contractual arrangements between the parties.[40]

[37](1985) 1 NSWLR 545.

[38]Karaguleski v Vasil Bros & Co Pty Ltd [1981] 1 NSWLR 267, 269.

[39]See Segulin v Car Owners’ Mutual Insurance Co Ltd (Unreported, Supreme Court of New South Wales, Needham J, 4 July 1984).

[40]Hortico (1985) 1 NSWLR 545, 549 (citations in original).

Having considered the authorities referred to immediately above, the primary judge reasoned as follows:[41]

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.[42]

[41]Reasons [30]-[31] (citation in original).

[42]Spry, Principles of Equitable Remedies (Thomson, 7^th ed, 2007) 466.

It is plainly true that the appropriateness of the ordinary approach identified by Young J in Hortico[43] must ultimately be governed by the circumstances of the case. Nevertheless, the authorities referred to exemplify the application of that approach in cases such as the present.
[43](1985) 1 NSWLR 545.

The further decisions of Bachmann Pty Ltd v BHP Power New Zealand Ltd,[44] Clough,[45] FMT Aircraft Gate Support Systems v Sydney Ports Corporation,[46] Redline Contracting Pty Ltd v MCC Mining (Western Australia) Pty Ltd[47] and Otter Group Pty Ltd v Maria Margaretha Wylaars[48] to which reference was made in submissions also reflect the centrality of construction issues to the resolution of applications for interlocutory relief with respect to performance bonds.
[44][1999] 1 VR 420.
[45](2008) 249 ALR 458.
[46][2010] NSWSC 1108.
[47][2011] FCA 1337.
[48][2013] VSC 98.

In our view, when all of these authorities are referred to it is plain that the ordinary practice in a case such as the present is to construe contractual terms which bear on basic issues in the case and which are capable of construction in the absence of further evidence. This practice also favours the conclusion that the contractual provisions here in issue should have been construed by the primary judge.

In the present case, both the question whether GC 5.2 was intended to allocate risk in the sense that we have explained and the question of the meaning of the words ‘acting reasonably’ found within GC 5.2 were basic legal issues which could and should have been decided.

The ordinary course adopted in the authorities referred to also conforms with the overarching purpose stated in s 7 of the Civil Procedure Act 2010, namely, to facilitate the just, efficient, timely and cost effective resolution of the real issues in dispute between the parties.

Nevertheless, it must of course be accepted that the particular circumstances of a case may dictate a departure from the ordinary practice. We turn now to the circumstances which the judge found determinative of the issue.

Was the proper construction of the contract best left to the trial of the proceeding?

His Honour concluded that the proper construction of the contract was best left to the trial of the proceeding for a final determination. That decision was discretionary. As the High Court put it in Cohen v Peko-Wallsend Ltd:

It is not right to say that it is always the duty of the court on an interlocutory application to decide a question of law upon which the decision of the case depends. No doubt if the question is one susceptible of resolution without further evidence, and the urgency of the matter does not render it impracticable to give proper consideration to the question, the desirable course will be to decide it.
Ultimately, however, the course which the court takes lies within its discretion. [49]

[49]Cohen v Peko-Wallsend Ltd (1986) 61 ALJR 57, 59 (Gibbs CJ, Mason and Wilson JJ).

Not only was his Honour’s decision a discretionary one,[50] it was based upon multifactorial considerations, each of which required judgments of fact and degree. Further, insofar as those judgments raised case management issues, those issues fell to be considered in the context of broader considerations entitling the judge to make judgments as to the overall allocation of time and resources within a specialist list of this Court.
[50]Magna Alloys and Research Pty Ltd v Coffey [1981] VR 23, 26.

The Court of Appeal will not lightly interfere with a judgment made on the basis of considerations of this kind. There is a presumption on appeal that the decision appealed from is correct and the decision should only be set aside if the Court of Appeal is satisfied that it involves a clear error.[51] Nevertheless, in the present case the matters ultimately identified by his Honour as founding his judgment could not properly be regarded as outweighing the factors we have already identified, which favoured construction of the relevant contractual provisions.

[51]Australian Coal & Shale Employees’ Federation v Commonwealth (1953) 94 CLR 621, 627 (Kitto J).

The primary judge concluded first that the issues of construction raised difficulty and there was no authority directly on point. Whilst the contractual provision in question was novel, the critical phrases in issue were limited ones utilising concepts well known to the law. They did not raise issues of unusual difficulty or depend upon aspects of surrounding factual circumstances.

Next, his Honour noted that the clause in issue, GC 5.2, utilised a modified version of the general conditions of contract AS4910–2002 for the supply of equipment with installation. Whilst it may be accepted that the clause was based on a standard form contract, the construction issues arose because in the form adopted it was a bespoke clause. The words which required construction had been adopted by the parties for the purposes of this particular contract. The questions of construction did not raise issues of general practice and importance.

Next, his Honour concluded that the limited time available to the Court would not enable careful reflection. It was open to his Honour to take some time in resolving the question. An extended interim injunction might have been granted pending that resolution. Indeed, the primary judge reserved his decision for five weeks and gave detailed reasons for his conclusions. We do not accept that time considerations could be regarded as being materially determinative of the issue in question.

Lastly, his Honour took the view that a final determination at this stage of the proceeding may give rise to a degree of hardship arising from the scale of the monetary sums involved. For the reasons we have explained, the nature of that hardship could not properly be assessed without determining whether the contractual provision was intended to allocate risk pending the final determination of the dispute between the parties.

The matters identified by his Honour do not outweigh the considerations which favoured the adoption of the ordinary practice in such matters.

It follows that his Honour was incorrect to put off the question of construction of the contract until the trial of the proceeding and to regard the issues which arose with respect to construction as giving rise to a serious issue which should be tried subsequently.

For completeness, we note that in expressing his conclusions his Honour said that it was appropriate to reserve the construction question 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) Rules 2005 if such were ordered on an application made on proper notice. The postulation of an alternative procedure does not resolve the problems with his Honour’s conclusions. In terms, he put off the construction questions to the trial and for the reasons we have explained this was not appropriate. Further, the trial of a separate question would not provide an appropriate vehicle for the resolution of interrelated issues arising upon the injunction application.

Conclusion

The primary judge did not decide whether GC 5.2 was intended to allocate risk pending the resolution of a dispute. In our view it was so intended and this in turn constitutes a consideration of fundamental importance in assessing whether the grant of an injunction carries with it the lower risk of injustice.

The parties made a commercial agreement as to when and how the performance bonds might be called upon. In doing so, they effectively determined which of them would bear the financial risk (up to approximately $4.2 million) without the need for the appellant to prove an entitlement to be paid. The safeguard negotiated and agreed by the parties was that the appellant must act reasonably when claiming an entitlement to payment and calling on the bonds. One important commercial effect of this was that the appellant did not have to wait until trial for payment of some amount by the respondent. This evident commercial purpose of GC 5.2, when viewed in the context of the accepted principles governing the grant of

interlocutory injunctions and the ordinary practice adopted in performance bond cases, required the primary judge to resolve the construction issues raised in order to properly determine whether an injunction should be granted. If this were not done, in effect, the parties would be deprived of the commercial bargain that they made.

We are in agreement with Kaye JA with respect to the remaining issues which arise on the appeal and with the order he proposes.

KAYE JA:

This is an appeal from the decision of a judge of the trial division to grant an interlocutory injunction restraining the appellant from seeking recourse to two bank guarantees provided by the respondent to the appellant.

On 20 June 2007, the appellant and the respondent entered into an agreement for the design, construction, supply and installation by the respondent of equipment for a new refined sugar station as part of an upgrade at the appellant’s existing facility in Yarraville. The initial contract sum was $41,900,000, and it was adjusted to $42,485,189 (excluding GST).

The contract was wholly in writing and was constituted by documents described in a Formal Instrument of Agreement dated 20 June 2007. That agreement specifically incorporated (inter alia) an amended version of the General Conditions of AS 4910 2002 (referred to as ‘the GCs’). The contract contained terms requiring the respondent (inter alia) to design and construct the works in a proper and workmanlike manner under adequate and competent supervision, to complete the works in accordance with the contract and any authorised directions to the satisfaction of the Agreed Acceptance Testing Performance criteria, and to bring the works to practical completion by the date for practical completion, being 7 November 2008, subject to extensions of time by the principal’s representative. The

contract also contained a term requiring the respondent to pay liquidated damages, if it failed to achieve practical completion by the specified date (as adjusted).

GC 43.1(c) of the contract provided that the total liability of the respondent, arising in connection with the subject matter of the contract, for a claim for rectification, was limited as follows:

…
(iv)For a liability arising in connection with a breach of the contractor’s professional duties, including without limitation of failure to design the works in accordance with the contract (whether such failure was negligent or otherwise) — $15,000,000;
…
(vi)Other than for events in relation to clause 43.1(c)(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 10% 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, with 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 limitation loss of profit or loss of revenue, or loss of use of the works howsoever arising.

Pursuant to GC 5.1, and Items 14(a) and 14(b) of Annexure Part A, of the contract, the respondent was required to provide the appellant with security in the form of two unconditional bank guarantees from BNP Paribas (‘the bank’). Each guarantee was to be for an amount representing 5% of the original contract sum, being $2,095,000 (that is, $4,190,000 in aggregate).

Under Item 14(b) of Annexure Part A, the respondent was required to provide security in accordance with the form and terms of the pro forma ‘unconditional undertaking’ contained in Annexure Part B. That undertaking was to provide that the bank:

… unconditionally undertakes to pay on demand any sum or sums which may from time to time be demanded by (the appellant) …
… it is unconditionally agreed that the Bank will make the payment or payments to the principal forthwith without reference to (the respondent) and notwithstanding any notice given by (the respondent) to the bank not to pay same.

In accordance with its obligations under GC 5.1, Item 14(a) and (b), and Annexure Part B to the contract, the respondent provided two unconditional undertakings dated 26 June 2007, each for the amount of $2,095,000.

GC 5.2 was central to the decision of the primary judge, and to the matters agitated on appeal. It was entitled ‘availability of security’, and provides as follows:

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 monies or an indemnity by the Contractor under or in consequence of or in connection with the Contract;
(ii)reimbursement of any monies paid to others under or in connection with the Contract; or
(iii)other monies 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 five 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.

Under the contract, in the event that the respondent failed to achieve practical completion by the due date, liquidated damages were payable by the respondent at the rate of $8,000 per day. The contract imposed a cap of 5% of the contract sum (that is, $2,095,000) on the maximum amount of liquidated damages payable by the respondent to the appellant for failure to reach practical completion by the due date. In March 2008, the principal’s representative extended the date for practical completion to 27 February 2009. The respondent did not achieve practical completion by that date, or before the purported termination of the contract by the respondent on 28 September 2011, or before the purported termination of the contract by the appellant on 3 November 2011. Prior to the latter two dates, liquidated damages had been certified by the principal’s representative, against payments otherwise due to the respondent, up to the capped limit of $2,095,000. After taking into account liquidated damages, and a deduction of $120,000 for negative variations, the balance of the liability cap under GC 43.1(c)(vi) was the sum of $2,024,215.

On 17 May 2011, the principal’s representative issued a direction to the respondent, under GC 49.2, purporting to prohibit the respondent from energising systems without first obtaining a permit to work from the appellant (‘the 17 May 2011 direction’). On 19 May, the respondent issued a notice to the appellant of alleged breaches of the contract concerning the conduct of the principal’s representative. On the next day, 20 May, the principal’s representative issued a direction to the respondent requiring it to remove certain specified personnel from the site by reason of their alleged failure to conform with the 17 May direction (‘the 20 May direction’).

On 31 May, the respondent gave the appellant a Notice to Show Cause, under GC 39.8. That notice alleged substantial breaches by the appellant in relation to the 17 May and 20 May 2011 directions, by the failure of the appellant to ensure that the principal’s representative acted reasonably and in good faith, in relation to those directions, and by failing to make proper assessments in relation to variations and negative variations. The appellant responded to that Show Cause Notice on 8 June. In turn, the respondent, by notice dated 16 June, suspended the works under GC 39.9 of the contract, on the basis that the appellant had not shown cause in relation to the alleged substantial breaches specified in the respondent’s Show Cause Notice dated 31 May 2011.

By letter dated 13 July 2011, the principal’s representative purported to withdraw the 17 May direction and the 20 May direction, under cover of objection that he was not obliged to do so. Similarly, by letter dated 13 July 2011 the appellant, by its solicitors, also purported to withdraw the 17 May direction and the 20 May direction, under cover of objection that the appellant was not obliged to do so.

The respondent continued to suspend the works on and from 13 July 2011. On 23 August, the appellant issued a Show Cause Notice to the respondent in relation to alleged substantial breaches under GC 39 of the contract. The notice alleged breaches consisting of the respondent’s failure to bring the works to practical completion by 27 February 2009, the respondent’s continued wrongful suspension of the works, the respondent’s defective works, and the failure of the respondent to provide other specified evidence of insurances and to provide other specified documents prior to commissioning.

By written notice dated 28 September 2011, the respondent purported to terminate the contract under GC 39.9. On 29 September, the respondent replied in writing to the appellant’s Show Cause Notice, disputing that it was in substantial breach, and contending that the appellant was not entitled to terminate the contract. By notice in writing dated 3 November 2011, the appellant purported to terminate the contract under GC 39.4(b).

On 8 August 2014, the appellant gave written notice to the respondent of its intention to have recourse to the unconditional undertakings under GC 5.2. The notice summarised claims by the appellant for the additional cost to complete the works, and the costs of rectifying defective works, totalling $9,903,365.93. The notice was undated, and it (incorrectly) named the relevant recipient as ‘Lend Lease Services (Australia) Pty Ltd’ instead of ‘Lend Lease Services Pty Ltd’. It provided the respondent with the option of providing cash in lieu of the unconditional undertakings in conformity with GC 5.2.

On the same day, 8 August 2014, the appellant commenced proceeding number SECI 2014 000041 in the Technology Engineering and Construction List of the Court. By further particulars provided in the proceeding, it claims damages totalling $9,443,291, consisting of the following:

(e) Increased costs of completing the works $2,744,062.

(f) Incurred costs of rectifying defects (as at 8 August 2014) $1,428,352.

(g) Estimated costs of rectifying further defects $5,270,877.

On 12 August, the respondent commenced its own proceeding in this Court, before it became aware of the appellant’s proceeding. In the general endorsement to its writ, the respondent claims that the appellant failed to ensure that the principal’s representative fulfilled all aspects of his role and functions reasonably and in good faith, and that the respondent accordingly validly terminated the contract on 28 September 2011. The respondent claims payments totalling $17,904,746 in respect of (inter alia) variations, reversal of negative variations, unpaid progress certificates, and balance of earned contract sum and delayed costs. It also claims project losses, calculated on a quantum meruit basis, totalling $67,171,483.50. In addition, the respondent claims declarations that the appellant wrongfully purported to issue the recourse notice, and that the recourse notice was invalid, and it seeks a permanent injunction restraining the appellant from having recourse to the unconditional undertakings.

By summons dated 12 August 2014, the respondent made application for an interlocutory injunction to restrain the appellant from having recourse to the unconditional undertakings. That application was heard on 29 August. On 24 September, the judge delivered his reasons. His Honour granted the respondent an interlocutory injunction, restraining the appellant from having recourse to the unconditional undertakings before the trial of the action or further order.

The primary judge’s reasons

The judge commenced his reasons[52] by noting that the respondent’s basic contentions, on the application, were that: the appellant had no entitlement under the construction contract to seek recourse to the bank guarantees; the appellant’s notice of recourse dated 8 August 2014 was invalid; and, should the appellant have recourse to the bank guarantees, the respondent would suffer significant commercial damage and injury to its reputation in the building industry.
[52]Lend Lease Pty Ltd v Sugar Australia Pty Ltd [2014] VSC 475.

In respect of the first contention, the judge considered the submission, made on behalf of the appellant, that he should finally determine the question of the correct construction of GC 5.2. He referred to the cases relied on by the appellant in support of that proposition, including the judgment of Young JA in Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd,[53] the judgment of Charles JA in Fletcher Construction Australia Pty Ltd v Varnsdorf Pty Ltd,[54] and the judgment of Young J in Hortico (Aust) v Energy Equipment Co (Aust) Pty Ltd.[55] His Honour considered that the proper construction of the contract, and in particular clause 5.2, was best left to the trial of the proceeding for a final determination. He noted that the standard form conditions, incorporated in the contract, are in general use in the engineering and construction industry, and that any final determination of the construction of the clause would have a ‘potential for ongoing precedent effect’.[56] The construction issue called for careful reflection. The limited time available to the court, together with the consequences to the parties of a final determination at that stage, were factors which should be taken into account. Accordingly, his Honour concluded that the construction question should be reserved to 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) Rules 2005.
[53][2010] NSWCA 283; (2012) 28 BCL 226.
[54][1998] 3 VR 812.
[55](1985) 1 NSWLR 545.
[56]Lend Lease Pty Ltd v Sugar Australia Pty Ltd [2014] VSC 476 [33].

The judge then noted that the commercial purposes of security provisions, involving the provision of a bank guarantee are, first, to provide security to the holder by enabling recourse against the third party bank, and, secondly, to allocate the risk as to which party should be out of pocket pending resolution of any dispute that may arise. Thus, clear words would be required to support a construction that inhibited a beneficiary from calling on a performance guarantee. Nevertheless, if a party in whose favour a bank guarantee has been given, has bound itself to a contractual fetter or qualification in relation to the recourse to that guarantee, breach of that qualification or fetter may be enjoined by applying the usual principles relating to the enforcement by injunction of negative stipulations in contracts.

The judge then noted the competing submissions by the parties as to the correct construction of clause 5.2. In particular, the appellant contended that the words ‘acting reasonably’ involved a solely subjective element to be determined by reference to the motive of the beneficiary from making the claim for the payment. Thus, the words ‘acting reasonably’, it was contended, only required the appellant to demonstrate it had a bona fide arguable claim for an amount equal to or in excess of the amount of the security. Alternatively, it was put by the appellant that if the phrase ‘acting reasonably’ involved an objective element, the respondent would need to establish that no reasonable person in the position of the appellant would have formed the view that it had a claim to be entitled to the payment.

The judge noted that, in response, the respondent had submitted that the appellant was not ‘acting reasonably’ in seeking recourse, given that: the respondent contended that it had no indebtedness to the appellant; the respondent had claims against the appellant that far exceeded the value of the claims by the appellant against the respondent; and the respondent had the benefit of a liability cap (clause 43) under the construction contract.

Having summarised those submissions, and set out the relevant terms of the agreement, the judge concluded that the question, whether there was a serious issue to be tried as to whether the appellant had entitlement under clause 5.2 to seek recourse to the bank guarantees, would depend upon the proper construction of the words ‘acting reasonably’. His Honour was satisfied that there was a serious issue to be tried as to at least two matters in relation to clause 5.2, namely:

(h) The correct construction of clause 5.2; and

(i) Whether, if the words ‘acting reasonably’ involved an objective analysis, the matters raised by the respondent had the effect that the appellant was not acting reasonably by seeking to call upon the bank guarantees.

The judge also was satisfied that the respondent had demonstrated a serious issue to be tried, in relation to the validity of the recourse notice, for three reasons:

(j) The notice was not addressed to the respondent, but rather to a non-existent entity (Lend Lease Services (Aust) Pty Ltd).

(k) On a proper construction of clause 5.2 of the contract, a call could only be made for payment or reimbursement of monies presently due, rather than for monies which may become due in the future. Only two of the items claimed in the recourse notice were for reimbursement of monies that had been expended by the appellant.

(l) The notice seeks to draw a sum greater than the available balance of a liability cap ($2,024,215).

The judge further considered that if no injunction were granted, but the claims of the respondent were ultimately vindicated, it would in all likelihood suffer irreparable harm, for which an award of damages would not be an adequate remedy. His Honour reached that conclusion on the basis that the appellant has a paid up capital of $4, it does not own the land on which the project is being constructed, and neither of the two companies that own its shares are guarantors of its obligations. His Honour also accepted that the respondent would suffer damage to its reputation should the bank guarantees be drawn on.

Accordingly, the judge was satisfied that the balance of convenience strongly favoured the grant of the injunction. His Honour reached that conclusion because the respondent would suffer damage to its reputation should the appellant enforce the bank guarantees, secondly, because there was an appreciable risk that the appellant would not be able to satisfy an award of damages, and, thirdly, in comparison, the judge was not satisfied that it was likely to be more than minimal inconvenience to the appellant should it be restrained from acting on the recourse notice pending the trial of the proceeding.

Submissions on appeal

The appellant submitted that the judge erred in concluding that there was a serious issue to be tried as to the right of the appellant to call upon the bank guarantees pursuant to the recourse notice dated 8 August 2014. In support of that submission, it contended that the judge erred in declining to construe GC 5.2. Counsel submitted that, on a proper analysis of the authorities, a judge is obliged, on the hearing of an application for an interlocutory injunction, to decide questions of law, such as those involved in the construction of GC 5.2. In particular, the judge failed to take into account that the construction of clause 5.2 was a critical issue, and that it was unlikely to be difficult or consumed in an inordinate amount of time. GC 5.2 was not a standard clause, but was rather a ‘bespoke’ clause. The decision of the judge, that the clause should be construed at the final hearing of the case, had the effect of depriving the appellant of the benefit of the clause.

On the question of a proper construction of GC 5.2, the appellant repeated the submissions that it made before the trial judge, and to which I have referred. In addition, it was submitted that the judge erred in finding that the respondent had established a prima facie case, or a serious issue to be tried, in relation to whether the appellant had satisfied the criteria prescribed in GC 5.2. In particular, the judge erred in failing to make any adequate factual finding in relation to the allegations by the respondent in support of its contention that the appellant did not ‘act reasonably’ for the purposes of clause 5.2. It was submitted that the judge should have made a provisional analysis of the factual issues agitated by the parties that affected the application of GC 5.2. In particular, it was submitted that the judge effectively disregarded the appellant’s case, by failing to consider the evidence as to the defective works, and evidence which (it contended) had the effect that the respondent was unlikely to be successful in establishing that it was entitled to terminate the contract. It was also submitted that the judge failed to make any adequate assessment of the evidence, which demonstrated that the claims asserted by the appellant were not subject to the liability cap prescribed in GC 43.1(c)(vi), but,

rather, were claims for losses attributable to breaches of professional duties, including defective design, within the meaning of GC 43.1(c)(iv).

In addition, it was submitted, on behalf of the appellant, that the judge erred in finding there was a serious question to be tried in relation to the validity of the recourse notice. In particular, the judge should have determined that issue, rather than considering, merely, whether there was a serious issue to be tried in relation to it.

The appellant further submitted that the respondent had failed to establish that, if the judge did not grant to it the interlocutory injunction, it would suffer irreparable harm. In particular, senior counsel for the appellant submitted that the judge failed to have regard to the undertaking offered by the appellant’s parent company, Wilmar Sugar Refining Investments Pty Ltd, to meet any judgment for the return of the security, in the event that it was ultimately found that the appellant was not entitled to have interim recourse. It was further submitted that the judge fell into error in failing to take into account that, at the time it entered into the contract, the respondent knew, or ought to have known, of the appellant’s paid up capital and lack of ownership of real estate. Counsel submitted that the judge did no more than refer to the respondent’s assertion, that it would suffer damage to its reputation, in the event that the appellant were permitted to rely on the recourse notices. In addition, the respondent knew, or ought to have known, at the time of the entry into the contract, of the potential impact on its reputation, in the event that the appellant would have recourse to the undertakings. Based on those propositions, it was submitted that the judge erred in failing to consider that the balance of convenience weighed against the grant of an injunction to the respondent.

In response, it was submitted on behalf of the respondent that the judge did not err in declining to construe clause 5.2 for the purposes of the application for an interlocutory injunction before him. It was submitted that the respondent had received no notice that the appellant sought a determination of clause 5.2 on a final basis, and there had been no suggestion that the appellant would make such a submission to the court before the hearing of the application before the primary judge.

Counsel for the respondent further submitted that two construction issues arise in respect of clause 5.2. The first issue was whether the words ‘acting reasonably’ involved a solely subjective analysis, or imported an objective requirement. The second issue was whether clause 5.2 only permitted the appellant to make a call on the guarantees for payment of reimbursement of money presently due or expended by the appellant, or whether a call might be made in respect of money that might become payable by the respondent in the future. It was submitted that the constructions advanced by the respondent, before the primary judge, were reasonably arguable, and they had a sufficient likelihood of success. The submission by the appellant that the decision of the judge, not to determine the construction of GC 5.2 to the final hearing, deprived the appellant of the value of the clause, must be considered in the context of the failure of the appellant to seek recourse to the guarantees for a period of three years after the contract had been terminated.

It was further submitted that a determination of those two construction issues would not have disposed of the proceeding. Two additional serious questions arose, namely, whether the appellant was, in any event, acting reasonably (however construed) by issuing the recourse notice, and whether the recourse notice was valid.

It was further submitted that the court should reject the submission by the appellant that there was ample evidence establishing the basis upon which the appellant sought recourse to the bank guarantees. In particular, the respondent had tendered evidence that (it contended) constituted a rebuttal of the alleged defects relied on by the appellant in support of its recourse notice. The respondent also submitted that the court should reject the submission by the appellant that the respondent was unlikely to be successful in establishing that it was entitled to terminate the contract in reliance on its Show Cause Notice and its notice of termination. In particular, it was submitted that the evidence demonstrated that the principal’s representative for the project had acted unreasonably, by obstructing the respondent from completing its works, and thus occasioning significant loss and damage to the respondent. In that connection, it was pointed out that the appellant subsequently terminated the principal representative’s engagement, and commenced proceedings against his company alleging misleading conduct by the representative.

It was further submitted that the contention by the appellant, that its claims were not subject to the liability cap prescribed by clause 43, but were losses attributable to breaches of ‘professional duties’, constituted a re-characterisation by the appellant of its claims for defective work, by asserting, for the first time, that the alleged defective work arose in connection with breaches of the respondent’s professional duties.

It was further submitted on behalf of the respondent that the judge did not err in determining that there was a serious issue to be tried in relation to the validity of the recourse notice given under GC 5.2. In respect of the issue of the likelihood of irreparable harm, it was submitted that the undertaking proffered by Wilmar Sugar Refining Investments Pty Ltd was wholly inadequate, in that it was limited to the aggregate amount of the guarantees, and did not cover damage to the respondent’s reputation. It was submitted that the judge did not err in accepting the evidence of the respondent as to the likely damage to its reputation, if the injunction was not granted. That evidence was given on affidavit by the group treasurer and the chief operating officer of the respondent.

In those circumstances, it was submitted that the judge was correct in determining that the balance of convenience lay in favour of the grant of the injunction.

Legal principles —appeal from grant of interlocutory injunction

The decision by a court, to grant or refuse an interlocutory injunction, is, by its nature, the product of the exercise of the court’s discretion.[57] There is therefore a presumption, on appeal, that the decision appealed from is correct, and the decision should only be set aside if the Court of Appeal is satisfied that it involves a clear error.[58] As I shall later discuss, the documentation before the primary judge, and before this Court, was voluminous. It is recognised that, in such cases, it is not possible for the court to traverse the facts in detail, or to come to a concluded decision concerning them.[59]
[57]Magna Alloys & Research Pty Ltd v Coffey & Ors [1981] VR 23, 26.
[58]Australian Coal & Shale Employees Federation v The Commonwealth (1953) 94 CLR 621, 627 (Kitto J).
[59]Magna Alloys & Research Pty Ltd v Coffey [1981] VR 23, 26.

The principles, governing the grant of an interlocutory injunction, are not in issue in this case. They require, first, that the applicant must demonstrate that there is a serious issue to be tried as to its entitlement to relief at trial. In order to satisfy that requirement, the applicant must make out a prima facie case as to its entitlement to that relief, in the sense that it must show a sufficient likelihood of success at trial to justify, in the circumstances, the preservation of the status quo pending trial.[60] In addition, the applicant must demonstrate that, if interlocutory relief is not granted, it is likely to suffer injury for which an award of damages would not be an adequate remedy, and that the balance of convenience favours the grant of the injunction.[61]
[60]Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57, 82 [65] (Gummow and Hayne JJ); see also 68 [19] (Gleeson CJ, Crennan J).
[61]Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57, 68 [19]; National Mutual Life Association of Australasia Limited v GTV Corporation Pty Ltd [1989] VR 747.

In this case, the appellant has submitted that the judge erred in concluding that the respondent had established each of those three propositions, which were necessary to the grant to it of an interlocutory injunction.

Serious issue to be tried: construction of contract

The submissions made on behalf of the appellant, that the judge erred in finding that the respondent had established a serious issue to be tried at the trial of the proceeding, necessarily involved two propositions advanced on behalf of the appellant, namely:

(m) The judge erred in failing to undertake a construction of the relevant clauses of the contract, and, in particular, GC 5.2, and GC 43;

(n) The judge erred in failing to conclude that, on a proper construction of those clauses, the respondent had not established that there was a serious issue to be tried as to the entitlement of the appellant to have recourse to the two bank guarantees provided to it by the respondent.

In my view, the authorities to which the primary judge was referred, and which I shall shortly discuss, support the proposition that, ordinarily, on an application for an interlocutory injunction to restrain recourse to a security provided under a building contract, a court should determine a controversial issue of law, if the determination of that issue is a necessary step to a conclusion whether an applicant is entitled to the injunction, unless, in the particular circumstances of the case, it is not practicable or appropriate to do so.

Those principles were stated by Young J in Hortico (Australia) Pty Ltd v Energy Equipment Co (Australia) Pty Ltd.[62] In that case, the applicant sought an interlocutory injunction to restrain its bank from paying monies to the beneficiary of a bank performance bond. In refusing that application, Young J rejected the construction of the bank guarantee relied on by the applicant. In doing so, his Honour expressed the applicable principles as follows:

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 … 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 … 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.[63]

[62][1985] 1 NSWLR 545.

[63]Ibid 549.

That passage, from the judgment of Young J in Hortico, was cited, with approval, by Charles JA in Fletcher Construction Australia Limited v Varnsdorf Pty Ltd.[64] That case concerned an appeal against the refusal of a trial judge to grant an interlocutory injunction restraining recourse by the respondent to standby letters of credit, that had been provided to secure the performance by the appellant of its obligations under a building contract. Charles JA, having referred to a submission advanced on behalf of the appellant, that resort to the security was subject to an express qualification that the respondent’s entitlement must be undisputed, stated:

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… If Varnsdorf’s argument as to the construction of the agreement is preferred, the fact that a genuine dispute exists as to whether Fletcher has achieved Handover would not, in my view, raise a serious question to be tried on the issue whether Varnsdorf is now entitled to call on the letters of credit.[65]

[64][1998] 3 VR 812.

[65]Ibid 821.

In his concurring judgment, Callaway JA, while not expressly considering the question, nevertheless undertook a construction of the security in question. Batt JA agreed with the reasons given by both Charles JA and Callaway JA.

More recently, in Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd,[66] Young JA stated the principles in terms consistent with those that I have already discussed. In that case, the New South Wales Court of Appeal was concerned with an appeal from a refusal by a trial judge to grant an interlocutory injunction to restrain the defendant proprietor from converting unconditional performance bonds given by an insurance company on behalf of the defendant builder. Young JA said:

… 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 the 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.[67]

[66][2010] NSWCA 283.

[67]Ibid [73]; see also [24]–[26] (Macfarlan JA).

In addition to the cases that I have just mentioned, there are a number of other instances in which the courts have undertaken a final construction of a security clause in a building contract, for the purposes of determining an application for an interlocutory injunction to restrain a building proprietor from having recourse to the security provided by that clause. Those cases include Clough Engineering Ltd v Oil & Natural Gas Corporation Ltd,[68] FMT Aircraft Gate Support Systems v Sydney Ports Corporation,[69] and Redline Contracting Pty Ltd v MCC Mining (Western Australia) Pty Ltd.[70]
[68](2008) 248 ALR 458, 471–7 [49-50], [74] ff (‘Clough Engineering’).
[69][2010] NSWSC 1108.
[70][2011] FCA 1337 [31]-[35]; see also Redline Contracting Pty Ltd v MCC Mining (Western Australia) Pty Ltd (No 2) (2013) 29 BCL 256; Otter Group Pty Ltd v Maria Margaretha Wylaars [2013] VSC 98, [16]–[18], [24]–[26], [32] (Hollingworth J).

I do not consider that the recent decision of the Court of Appeal in RSD Chartered Accountants v Bolitho,[71] that was relied on by the respondent, alters or in any way qualifies the principles to which I have just referred. In that case, the court was concerned with an application for leave to appeal against a decision of a primary judge granting leave to the plaintiff to amend its statement of claim. The amendment, so allowed, raised contentious issues as to the correct construction of s 729 of the Corporations Act 2001. The point raised, by the amendment, was a novel point of law, and the court considered that it was inappropriate to dispose of it, finally, on an application for leave to amend a pleading.
[71][2014] VSCA 186.

An application for leave to amend a pleading is, of course, significantly different, and distinct, from an application for an interlocutory injunction. In an application for leave to amend a pleading, the court proceeds on the basis that the application will be granted (subject to other issues), provided that the amended pleading would not be one which would be liable to be struck out on a summary application.[72] Thus, the court ordinarily allows an amendment, unless it is plainly demurrable.[73] Self-evidently, those principles are significantly different to the principles that guide a court in determining a disputed question of law on an application for an interlocutory injunction, particularly where the application is to restrain recourse to a security provided under a building contract.
[72]See for example Horton v Jones (1939) 39 SR (NSW) 305, 310 (Jordan CJ).
[73]Dey v Victorian Railways Commissioners (1949) 78 CLR 62.

Based on those principles, in my view, the primary judge ought to have determined the correct construction of GC 5.2, in order to determine whether the respondent had demonstrated that there was a serious issue to be tried as to the application of that clause to the circumstances of the case revealed in the affidavits before him.

In the present case, it is not suggested that the construction of GC 5.2 would involve or require evidence as to the factual matrix in which the contract was concluded.[74] The construction of clause 5.2 is a discrete question, which did not involve consideration of any detailed or complex material. The resolution of the application before the court was not urgent, as the respondent’s rights had been protected by an interim injunction. While it was important that the judge deliver his decision expeditiously, nevertheless the judge did have some time to consider the issues raised by the parties before him.
[74]cf Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337, 352 (Mason J).

The appellant advanced detailed written submissions to the judge in relation to the construction of clause 5.2, and counsel addressed them in oral argument before the judge. The respondent did not address those arguments in any detail, other than to submit that the appellant was not ‘acting reasonably’, for the purposes of clause 5.2, in seeking to call on the guarantees, given that: the respondent contended it was not indebted to the appellant; the respondent had cross-claims against the appellant that far exceeded the appellant’s claims against the respondent; and the respondent had the benefit of a monetary cap on its liability under clause 43 of the contract. That submission was based on the implicit proposition that, in circumstances of the kind relied on by the respondent, the appellant would not be acting reasonably by claiming the amounts stated in the recourse notice. In that way, the respondent did impliedly advance a construction of clause 5.2 for which it contended.

Importantly, the resolution of the issue of the construction of GC 5.2, was a necessary prerequisite to determining whether the respondent had established that there was a serious issue to be tried as to whether the appellant had acted ‘reasonably’ in claiming to be entitled to payment of moneys secured by the guarantee. The parties had placed a large amount of material before the judge relating to the claims and cross‑claims made by each other in relation to the works carried out by the respondent. It was necessary to resolve the construction of clause 5.2, in order to determine whether, and how, the existence of the dispute, reflected in those claims and cross‑claims, was relevant to the application of clause 5.2 If, for example, the appellant is correct in submitting that the phrase ‘acting reasonably’ only required the appellant to act bona fide in a subjective sense, it would follow that the existence of the dispute, as to the amount claimed by the appellant, would not be relevant to the exercise by the appellant of its rights under clause 5.2. Equally, if, as submitted by the respondent, that phrase imported an objective criterion, it would be necessary to determine the nature of that criterion, in order to decide whether the appellant was acting reasonably, in light of the issues raised in the dispute to its claim.

It is significant that the respondent had provided the appellant with the first report prepared by Mahaffey in late 2010. The matters raised in that report, in my view, were sufficient to bring to the notice of the appellant reasonable bases upon which its claim against the respondent, in respect of the first item, might not be justified. In those circumstances, there is a serious issue to be tried whether, in light of its knowledge of that material, the appellant acted reasonably in claiming the first item of the cost of rectifying defective work specified in the recourse notice.

The second item (cost of rectification of dehumidified air supply system $2,100,000) was supported by a report by Beca Pty Ltd. In that report, Beca stated that the air supply system, as supplied, had some key discrepancies in relation to the specification requirements in two main respects. First, Beca noted that the temperature control of dehumidified air to the conveyors did not have post cooling or heating. Secondly, Beca noted that the use of a shared dehumidifier for multiple conveyors was primarily dependent on the ability of multiple components to be controlled, in order not to have an adverse effect on the operation of the individually fully loaded conveyors. Four issues were identified as requiring to be assessed during commission, namely, first, the response of the dehumidifier to increasing/decreasing flow requirements, secondly, the response and control of the secondary booster fan to match the manufacturer’s output and conveyor requirements, thirdly, the aero belt could not ‘bind’ if insufficient air was supplied via the shared system, and, fourthly, the aero belt leakage and air flow requirement would increase with a reduction in product loading on the conveyor.

In response, the respondent (through its solicitor) stated that the tender design for the works was prepared by Beca, which was engaged by the appellant, and which was responsible for the specification and tender design for the project. That tender design (the respondent maintained) did not indicate any need for post cooling or heating for the dehumidified air.

In respect of the second principal issue, namely, the shared use of a dehumidifier for multiple conveyors, the respondent maintained that the tender design (prepared by Beca) showed a single dehumidifier supplying a number of air belt conveyors. Further, the respondent stated that the four particular issues, related to the use of a single dehumidifier, were control system issues, and thus were not the responsibility of the respondent. It is also contended on behalf of the respondent that the estimated cost of reworking the dehumidifier was excessive.

The materials do not disclose that the appellant specifically knew of the matters raised by the respondent in its response to the Beca report. However, it is reasonably arguable that the appellant ought to have known the relevant aspects of the tender design prepared by Beca. The proposition by the respondent, that the matters raised by Beca were largely a product of that design, was not responded to by the appellant in the material placed before the primary judge. In those circumstances, it is reasonably arguable that the appellant ought to have known that those matters might have been due to the nature of the design prepared by Beca, rather than to any departure by the respondent from the design. Accordingly, I consider that there is a serious issue to be tried as to whether the appellant acted reasonably in claiming the second item of the cost of the rectification works (the estimated cost of rectification of dehumidified air supply system) in the recourse notice.

Items (iii) to (v) of the defects, specified in the recourse notice, were also the subject of the report by Beca. They relate to access, guarding, support and lifting, and ventilation and hygiene.

The Beca report contains an appendix setting out examples of circumstances, in which it is alleged that the respondent failed to adequately provide for safe access to equipment and maintenance, failed to adequately provide for guarding of machinery and equipment, and failed to provide for support or lifting.

In response, the respondent (by its solicitor’s letter) maintained that there was a specific qualification to the respondent’s tender in relation to the provision of access openings, so that where the ‘for tender’ drawings did not depict the principal’s intended mode of access to particular equipment, the respondent was not obliged to provide for such access. As I have stated above, it is reasonably arguable that the appellant should have been aware of the relevant aspects of the tender design prepared by Beca, including those relating to access, and that the appellant ought to have known that the lack of access was or might have been attributable to Beca’s design, rather than any failure of the respondent to conform with it. Thus, it follows there is a serious issue to be tried whether the appellant acted reasonably in claiming the costs of rectifying defective access in the recourse notice.

In respect of the guarding defects, the respondent maintained that the obligation to install any missing guarding was an item to be completed by the respondent before it finalised the work. If the contract had not been terminated, the respondent would have installed those guards in accordance with its contractual requirements.

In my opinion, it is arguable that the appellant ought to have appreciated that the lack of guarding may have been a consequence of the termination of the contract. As I have already stated, it is also arguable that the appellant ought to have understood that the termination of the contract, and thus the lack of guarding, was an issue intricately connected with the difficulties involving the relationship between the respondent and the principal’s representative, in the circumstances I have already described. Accordingly, there is a serious issue to be tried as to whether the appellant acted reasonably in making a claim in respect of the alleged guarding defects.

In response to the issue relating to inadequate support, the respondent has responded with the bald proposition that there was no evidence of any error, and it also contended that the cost of that item ($53,002) is excessive. I do not consider that that response is adequate to establish a reasonable argument that the appellant acted unreasonably in making a claim in respect of the inadequate support.

In respect of the inadequate lifting, the respondent provided detailed responses in respect of the items identified by Beca. Without setting out the detail of those responses, I consider they are such that it is arguable that the appellant did not act reasonably in claiming in respect of the lack of a lifting provision.

The fifth item, of the costs of rectification, concern the rectification of ventilation and hygiene. The Beca report contained a number of details in which it alleged that the respondent’s documents relating to the ventilation system did not meet the requirements under the contract. The particular problems resulting from those deficiencies impacted on hygiene and on air flow rates. However, as there was no estimate of the cost to rectify those defects, no amount, ultimately, was claimed in the recourse notice. Thus, the question, whether it was reasonably made, is academic.

The sixth and seventh items (costs incurred in relation to leaking buildings, and estimated costs of recladding the buildings) were the subject of a report by Mr Andrew Baigent, a consulting engineer. In his report, Mr Baigent noted that there had been ongoing problems with water ingress through the refined sugar station since it had been constructed. It was noted that the water ingress had occurred through the building façade during rain, and also through the basement retaining walls that are in contact with the ground. Mr Baigent’s report was concerned with the building façade. His view was that the problem of water ingress was due to the failure to apply sealant in a consistent manner, and he was of the view that, in a number of areas, the sealant appeared to be ineffective.

In response, the respondent’s solicitor stated that the sealant had been applied by the respondent’s subcontractor, Western Sheet Metal. The subcontractor was continuing to rectify the defects as at 17 May 2011, when the works were suspended. Before the termination of the contract, the respondent had rights and remedies against Western Sheet Metal, and the respondent could have required Western Sheet Metal to complete its work scope to an acceptable standard. The respondent also contended that, since the appellant had elected to use the contractor to continue to perform the works, the issues experienced have been caused by, or not rectified by, the appellant’s contractor.

Based on that response, senior counsel for the respondent contended that it was not demonstrated that the defects, in the application of the sealant, arose before the suspension of the respondent’s work in July 2011. However, that submission ignores the fact that Mr Baigent, in his report, described the position concerning the ingress of water, and the defective application of the sealant, as at the time that he inspected the building in May 2011. Thus, it is clear that the defects, which are the subject of items (vi) and (vii), were caused by defective workmanship by the respondent’s contractor before the respondent had departed from the site.

In those circumstances, there is no evidential basis upon which it could be concluded that there was a serious issue to be tried, as to whether the appellant acted reasonably in claiming the costs of rectification of the sixth and seventh items, totalling $1,946,549.

There is no material supporting the appellant’s claim in respect of the eighth item, namely, the estimated cost to rectify defective chutes. In the absence of any such material, there was an arguable issue as to whether the appellant did not act reasonably in claiming that amount in the recourse notice.

Summary of conclusions: serious issue to be tried — whether appellant was acting reasonably in making claims

Based on the foregoing, therefore, I have reached the following conclusions, as to whether there was a serious issue to be tried whether the appellant acted reasonably in making the claims stated in the recourse notice:

(1)There was a serious issue to be tried whether the appellant acted reasonably in claiming the additional cost to complete the works ($3,041,062.93).
(2)There was a serious issue to be tried whether the appellant acted reasonably in claiming items (i), (ii), (iii) and (iv) (except relating to the guarding) and (viii) of the costs of rectification of defective works.
(3)There was not a serious issue to be tried as to whether the appellant acted reasonably in claiming the costs of rectification of guarding (claimed as part of items (iii) and (iv)), item (vi) and item (vii).

The amount claimed, in respect of the three items in respect of which there was no serious issue to be tried, totals $1,999,551. It follows that there was not a serious issue to be tried in relation to whether the appellant acted reasonably in claiming items totalling that amount in the recourse notice.

The application of GC 43.1(c)(vi) to the amount claimed by appellant in the recourse notice

Based on those conclusions, it is not necessary to determine the questions that have been raised relating to the application of the liability cap prescribed under GC 43.1(c)(vi). However, as the matter arose before the primary judge, and has also been raised on appeal, I shall state my conclusions in relation to it.

By the recourse notice, the appellant stated that it intended to have access to the unconditional undertakings, under GC 5.2, for claims totalling $9,903,365.53. Under GC 5.2, the undertakings were available to the appellant, where it claimed (acting reasonably) to be entitled: to the payment of monies or indemnity by the respondent under or in connection with the contract; to the reimbursement of any monies paid to others under and in connection with the contract; or to other monies payable by the appellant to the respondent. Thus, the appellant was only entitled to have recourse to the security in respect of claims which, if accepted, would be claims under or in connection with the contract.

As I have already noted, under GC 43.1(c)(iv), the appellant was entitled to claim damages against the respondent to a total sum of $15,000,000, if that claim arose ‘in connection with a breach of the contractors’ (the respondents) professional duty’. Otherwise, under GC 43.1(c)(vi), the appellant was confined to a claim for damages against the respondent to a sum not exceeding 10% of the contract sum. It is common ground that, taking into account liquidated damages already certified by the respondent’s representative, and a deduction for negative variations, the balance of the liability cap available under GC 43.1(c)(vi) is the sum of $2,024,215.

If I had considered that there was not a serious issue to be tried whether the appellant acted reasonably in claiming a sum in excess of that amount, the question would arise whether there was a serious issue as to the entitlement to the appellant to seek recourse to the securities, by its notice dated 8 August 2014, for a sum in excess of $2,024,215. That issue would be resolved by determining whether there was a serious issue whether the claims, asserted by the appellant in its notice, were claims arising in connection with a breach by the respondent of its ‘professional duties’ for the purposes of GC 43.1(c)(iv).

As I have noted, the amounts, claimed by the appellant in its notice dated 8 August 2014, basically consisted of two principal amounts, namely:

(o) The increased cost of completion of the works – $3,041,062.93.

(p) The cost of rectification of defective works – $6,862,303.

The former amount — the increased cost of completion of the works — was calculated by subtracting, from an estimate of the cost to complete the works ($7,954,602), the unpaid balance of the contract sum ($3,782,187.07) and the costs of rectifying defective work that had already been incurred and paid ($1,428,352). As I have already explained, the amount claimed, as the additional costs to complete the works, comprised damages, to which the appellant would be entitled on the basis that the respondent had wrongfully repudiated the contract. It follows that, by their nature, the costs of completing the works could not be described as costs arising in connection with a breach by the respondent of its professional duties.

In any event, the estimate of the cost to complete the works was the subject of an affidavit, on behalf of the appellant, by Devendra Mali, the Capital Planning Engineer of the appellant. According to that affidavit, the estimated cost to complete the works comprised some twelve components. There was no evidence on behalf of the appellant that any of those additional costs were incurred as a result of a breach by the respondent of its professional duties. In particular, there is no evidence indicating that the additional costs to complete the works resulted from any defective design work carried out by the appellant. On the face of the description of them, it would appear that a number of those components may not be attributable to any such failure. In those circumstances, on the materials placed before the court, there would be a serious issue to be tried as to whether that part of the claim in the recourse notice arose in connection with a breach by the respondent of its professional duties.

The next question is whether there was a serious issue to be tried as to whether any of the costs, of rectification of the defective works, arose in connection with a breach by the respondent of its professional duties.

As I have stated, the first item of the cost of defective works was the subject of reports by AECOM. In those reports, AECOM appeared to implicate two causes of the issues relating to the adequacy of the concrete use for the construction of the main raft slab at the refined sugar station, namely, the inadequate mix design, and the failure of the concrete, that was supplied, to meet specifications by the appellant or to accord with the recommendations from Ancon Beton. Although it is not clear, it would seem that at least some aspects of the mix design (namely, the need for a higher cement content) were due to the inadequacy of the appellant’s own concrete specification. To that extent, the problem could not be attributed to any breach by the respondent of its professional duties. Clearly, the failure of the supplied concrete to meet the appellant’s specifications, and Ancon Beton’s recommendations, was not the result of any breach by the respondent of its professional duties. In those circumstances, there is, at the least, a serious issue to be tried as to whether the first item of the defects, alleged in the notice dated 8 August (the estimated cost of rectification of concrete work), was caused by breaches by the respondent of its professional duties under the contract.

Beca Pty Ltd, in its report, stated that the dehumidified air supply system, that had been supplied (item (ii)), did not comply with the contract specifications. A fortiori, there is a serious issue to be tried whether the costs claimed in this item arise from a breach by the respondent of its professional duties.

On the other hand, the Beca report stated that the deficiencies, in relation to access, guarding, and support/lifting (items (iii) and (iv) of the notice of 8 August 2014), were due to deficiencies in the design documentation. The report also attributed deficiencies in the ventilation (item (v)) to deficiencies in the documentation prepared by the respondent. While the respondent takes issue with the proposition that there were deficiencies in any of those respects, nevertheless, as I understand it, it does not take issue with the proposition that the deficiencies described by Beca were design issues. Thus, if those defects were attributable to any fault of the respondent, they would be the result of a breach by the respondent of its professional duties under the contract.

As I have stated, in respect of items (vi) and (vii), Mr Baigent attributed the problems with the water ingress, throughout the refined sugar station, to the defective application of sealant. Mr Baigent stated that the sealant had not been placed in a consistent manner, and that, in a number of areas, it appeared to be ineffective. On that basis, there would clearly be a serious issue to be tried as to whether the costs, of rectifying that issue, arose from a breach by the respondent of its professional duties.

Based on the foregoing, if it had been necessary to determine the question, the respondent has demonstrated that there was a serious issue to be tried as to whether the costs to complete the works, and items (i), (ii), (vi) and (vii) of the costs to rectify the works, were subject to the cap prescribed by GC 43.1(c)(vi) of the contract.

Serious issue to be tried — existence of respondent’s cross-claim

The next question, relating to the question whether there was a serious issue to be tried, is whether the appellant was acting reasonably in making the claims in the recourse notice, in circumstances in which the respondent was asserting a significant cross-claim against it.

In particular, it was submitted, on behalf of the respondent, that the size of its claims against the appellant were significantly larger than the claims made by the appellant against the respondent. Thus, it was submitted that, even if the appellant’s claims were ultimately upheld, they would be set off against the respondent’s claims. In those circumstances, it was contended, the appellant could not be said to be acting reasonably in seeking recourse to the bank guarantees under clause 5.2.

As a preliminary matter, that argument does not address the effect of clause 5.2. As I have already noted, that clause does not require that the appellant act reasonably in seeking recourse to the bank guarantees. Rather, it requires that the appellant must be acting reasonably in claiming to be entitled to the monies or indemnity specified in the recourse notice.

There is nothing in the material, which demonstrates that the appellant was aware of the cross-claims asserted by the respondent, at the time at which the appellant served the recourse notice on the respondent. In those circumstances, the appellant could not be said to have acted unreasonably, in circumstances in which it did not know of any potential cross-claim or set off to be asserted on behalf of the respondent.

In any event, if the respondent could demonstrate that the appellant knew of the set off or cross-claim now asserted by it, the respondent has not demonstrated that it is reasonably arguable that the appellant acted unreasonably in making its claims, notwithstanding its knowledge of those cross-claims or set offs. I have reached that conclusion based on the materials relied on by the respondent in support of the cross-claim asserted in the proceedings instituted by it.

In his affidavit sworn 12 August 2014, Mr Pethier provided details of the further payment of $17,904,746, which the respondent considers is owing to it by the appellant pursuant to the contract. Mr Pethier stated that that claim included an amount of $3,874,719, which consisted of the difference between the adjusted contract sum payable under the contract, and the amount paid to the respondent to date. Clearly, that claim is flawed. On any view, the contract had been terminated before the works were completed. The respondent was only entitled to full payment under the contract upon completion of the works. As the contract had been terminated before completion, the respondent was not entitled to the difference between the contract sum and the amounts paid to date. Rather, if the appellant breached the contract, it would be entitled to make a claim for loss of profits. The respondent’s materials do not make or support any such claim.

Mr Pethier then set out six further items, which, together with the amount I have just discussed, total the amount of $17.9 million claimed by way of set off. The first, second and fifth items relate to variations. In response to those items, Mr Clark, in his affidavit sworn 20 August 2014, stated that those variations have been properly assessed by the principal’s representative and rejected in their entirety. In light of that response, I do not consider that the appellant acted unreasonably in not taking those three amounts into account in making the claim against the respondent.

The third item, referred to by Mr Pethier, consisted of delay and suspension costs from 17 May 2011 to date ($3,885,384). Those amounts clearly are not claimable in their entirety, as, on any view, the contract was terminated at least by 3 November 2011. I do not consider that the appellant would have acted unreasonably in not taking those matters into account in making the claim in the recourse notice.

The fourth item consisted of ‘contract sum earned since 31 March 2011’ ($638,081). In his affidavit, Mr Clark stated that the respondent had been paid all amounts owing for work performed before termination. Accordingly, again, the appellant was not required to take that amount into account in making its claim against the respondent.

The sixth item consists of ‘litigation costs before McDougall J’. The respondent’s materials do not provide any support for that claim. Again, the appellant was not required to take it into account.

In addition, the respondent stated that it had incurred costs of $105,781,953.50 in designing and constructing the project, and that it had received a total of $38,610,470 in payments from the appellant. Thus it claimed that its ‘project losses’ totalled $67.1 million. In the proceedings, issued by it against the appellant, the respondent claims those amounts by way of damages. However, in the absence of other material, the fact that the respondent suffered project losses is not material to the issue as to the damages sustained by the respondent as a result of any alleged repudiation by the appellant of the contract. Thus, the appellant was not obliged to take those losses into account (if the appellant knew of them) in making the claim contained in the recourse notice.

For those reasons, I do not consider that there was a serious issue to be tried as to whether the appellant acted unreasonably in making the claims contained in the recourse notice, notwithstanding the existence of the cross-claims or set offs asserted by the respondent against it.

The validity of the recourse notice

The final issue, relating to whether there was a serious issue to be tried, concerns the validity of the recourse notice given by the appellant to the respondent on 8 August 2014. The respondent has submitted that there was a serious issue to be tried as to whether that notice was valid, for three reasons.

First, it is contended that the recourse notice was invalid, because it was not addressed to the respondent, but, rather, to a non-existent entity, ‘Lend Lease Services (Australia) Pty Ltd’. That argument is without merit. The notice was clearly received by the respondent. There could be no doubt, in the circumstances of the case, that it was intended by the appellant that it be addressed to the respondent.

The second point raised by the respondent is that, on a proper construction of clause 5.2, a call could only be made by the appellant for payment or reimbursement of monies due, rather than for monies which may become due in the future. I have already rejected that argument, in considering the proper construction of clause 5.2.

The third point, raised by the respondent, as to the validity of the recourse notice, was based on the proposition that the notice stated a claim that was greater than the available balance of the liability cap, which, it is contended, is the sum of $2,024,215, as a result of GC 43.1(c)(vi).

I have already reached the conclusion that there is a serious issue to be tried whether the amounts claimed by the appellant, in the recourse notice, for increased costs to complete the works, and whether items (i), (ii), (vi) and (vii) of the defective works, were amounts resulting from a breach by the respondent of its professional duties for the purposes of GC 43.1(c)(iv). Those amounts total $8.7 million, which is well in excess of the cap prescribed in GC 43.1(c)(vi).

In my view, the fact that the amounts claimed by the appellant, in the recourse notice, might exceed its contractual entitlement did not have the effect of invalidating the notice, at least to the extent to which the claims in the notice were within the limit prescribed by the contract. The service of the notice was a precondition to the entitlement of the appellant to have recourse to the securities. However, on a proper construction of the plain words of GC 5.2, I do not consider that such a notice would be invalid, if it included claims for amounts that were, or arguably were, beyond the limit prescribed by the contract.

Summary of conclusions: serious issue to be tried

For the reasons that I have stated, the respondent did not establish, on the material before the court, that there was a serious issue to be tried in respect of the claims stated by the appellant in its recourse notice for the cost of rectification of the guarding (part of items (iii) and (iv)), and for the costs to rectify items (vi) and (vii) in the notice, such costs totalling $1,999,951. Apart from those items, the respondent did demonstrate that there was a serious issue to be tried as to whether the appellant acted reasonably in claiming the balance of the items stated in the recourse notice. It follows that the judge erred in granting an interlocutory injunction to restrain the appellant from having recourse to the securities at least for the amount of $1,999,951. The question, which now arises, is whether, in light of that conclusion, the balance of convenience favoured the grant to the respondent of an injunction restraining access by the appellant to the securities in respect of the balance of the amount available under the securities, namely, $2,190,049.

Balance of convenience

The primary judge found that the balance of convenience favoured the grant of an injunction to the respondent on three grounds, namely:

(q) The respondent would suffer significant reputational damage should the appellant cash the bank guarantees.

(r) There was an appreciable risk that the appellant would not be able to satisfy an award of damages, should the respondent ultimately succeed in its claims against it.

(s) The judge was not satisfied there was likely to be more than minimal inconvenience to the appellant, should it be restrained from acting on the recourse notice pending the trial of the proceeding.

The respondent relied on two affidavits in support of its contention that it would suffer damage to its reputation, if the appellant should have recourse to the undertakings given by it. The chief operating officer of Construction and Infrastructure of the respondent, Dale Connor, deposed that he considered that a call by a client on the respondent’s security would affect the respondent’s reputation in the market place for work in the Australian construction industry. He stated that, to his knowledge, it was very rare for any company in the Lend Lease group to have its security cashed on a project. The Group Treasurer of the respondent, Michael Larkin, deposed that if the security was called, it could impact adversely on the respondent’s reputation, and consequently on the cost and availability of bank guarantees and performance bond facilities to the respondent.

I do not consider that the matters deposed to by Mr Larkin and Mr Connor are sufficient to weight the balance of convenience in favour of the grant of the injunction to the respondent. First, the matters stated in the affidavits were substantially assertions. Secondly, and importantly, the respondent has failed to sustain the injunction granted to it for a sum of at least $1,999,951. Thus, as a result of the conclusions I have so far reached, the respondent will sustain any such reputational damage in any event. Thirdly, by agreeing to the recourse clause (clause 5.2), the respondent assumed the risk that a call may be made upon the security. In addition, I should add that it is notorious that disputes are commonly part and parcel of building contracts. I have some reservations as to the assertions made in the affidavits of Mr Connor that the existence of the dispute in this case would have any substantial adverse impact on the reputation of the respondent in the market place.

The finding by the judge, that there was a risk that the appellant would not be able to satisfy an award of damages, should the respondent ultimately succeed in the litigation, did not, in my view, adequately take into account that the appellant, in the course of the application before the judge, proffered an undertaking by Wilmar Sugar Refining Investments Pty Ltd (‘Wilmar’). Wilmar undertook that if the appellant had recourse to some or all of the amounts secured by the undertakings, and if, pursuant to a final judgment of the court, it was determined that the appellant was not entitled to have recourse to that security, then Wilmar would repay the security to the respondent upon 14 days’ written notice. Wilmar is the major shareholder of the appellant. The financial documents, put before the judge, demonstrate sufficiently that Wilmar had ample means to meet its obligations under the undertaking to the court, if called upon to do so.

The undertaking was signed for and on behalf of Wilmar by Duncan Glasgow, the Legal Counsel and company secretary for Wilmar. There was no suggestion that the undertaking does not apply if the appeal is determined in favour of the appellant. It is not limited, by its terms, to the outcome of the application before the primary judge. As I have already noted, senior counsel for the appellant relied on the undertaking in support of the contention that the balance of convenience did not favour the grant of an injunction to the respondent. In those circumstances, it follows that the respondent has failed to demonstrate that, if the appeal is allowed, there is a risk that the appellant would not be able to satisfy an award of damages, should the respondent ultimately succeed at trial.

On the other hand, if the interlocutory injunction were granted, the appellant would be held out of its rights to access the security until the trial of the principal building disputes between the parties. In that way, it would be deprived of the right, provided to it under clause 5.2, that the respondent, and not the appellant, carry the risk as to which party is out of pocket pending the resolution of the disputes between them. I accept that that point is, to some extent, undermined by the delay of the appellant in seeking to access its rights to the security between the date of termination of the contract in November 2011, and the first date upon which it called upon its rights under the security, in March 2014. However, I do not consider that that delay was of sufficient moment to nullify the point made on behalf of the appellant, particularly as the substantive issues in the case are of such dimension that, in all likelihood, it is doubtful that a trial of those issues between the parties will be held in the near future.

For those reasons, I do not consider that the respondent has demonstrated that the balance of convenience favours the retention of the injunction against the appellant, in an amount in excess of $1,999,951.

Summary of conclusions

For the reasons which I have set out at some length above, I have therefore reached the following conclusions:

(1)The primary judge erred in the exercise of his discretion in failing to reach a concluded view as to the correct construction of GC 5.2.
(2)The respondent has established that there was a serious issue to be tried as to whether the appellant acted reasonably in making claims, in the recourse notice, for an amount in excess of $1,999,951. Otherwise, the respondent failed to demonstrate that there was a serious issue to be tried in respect of the right of the appellant to access securities in respect of that amount.
(3)The balance of convenience does not support the grant to the respondent of an injunction restraining the appellant from access to the securities for an amount in excess of $1,999,951.

It follows that the appeal should be allowed, and the order of the primary judge set aside.

In reaching those conclusions, it is important to note that the issues raised by the parties, both before the primary judge and on appeal, involved and necessitated a close analysis of the quite voluminous factual material put before the court. As I have noted, neither party took the judge (or indeed the Court of Appeal) to those materials, other than by way of a brief reference to them in the written submissions. In saying that, I am not critical of the approach of either party. However, that approach left the primary judge in a particularly invidious position. His Honour, as a trial judge, in charge of a busy list, did not have available to him the time to undertake the detailed analysis of the materials, that I have been able to engage in. The fact that I have reached a conclusion, that differs to that of the primary judge, is very much a product of that particular circumstance. In cases of the same nature in the future, it is important that the parties cooperate to present the materials to the judge in a manner better designed to assist the judge in determining the issues that are raised.

In particular, in such a case, the parties should prepare a document setting out (with appropriate references to the affidavits) the evidence relied on by each side in support of each item claimed in the recourse notice. It is not appropriate, or feasible, for a trial judge to be left in a position of having to sift through the material to identify, and assess, parts of voluminous affidavits that relate to the various claims and cross-claims asserted by and against each of the parties.

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[2015] VSCA 98

13 May 2015