Synergy Construct Australia Pty Ltd v GSA North Terrace Pty Limited Atf GSA North Terrace Unit Trust

[2025] SASCA 72

SUPREME COURT OF SOUTH AUSTRALIA

(Court of Appeal: Civil)

SYNERGY CONSTRUCT AUSTRALIA PTY LTD v GSA NORTH TERRACE PTY LIMITED ATF GSA NORTH TERRACE UNIT TRUST

[2025] SASCA 72

Judgment of the Court of Appeal  

(The Honourable Acting Chief Justice Livesey, the Honourable Justice S Doyle and the Honourable Justice B Doyle)

3 July 2025

EQUITY - EQUITABLE REMEDIES - INJUNCTIONS - INTERLOCUTORY INJUNCTIONS - SERIOUS QUESTION TO BE TRIED - BALANCE OF CONVENIENCE GENERALLY

CONTRACTS - BUILDING, ENGINEERING AND RELATED CONTRACTS - THE CONTRACT - CONSTRUCTION OF PARTICULAR CONTRACTS AND IMPLIED CONDITIONS

CONTRACTS - BUILDING, ENGINEERING AND RELATED CONTRACTS - THE CONTRACT - CONSTRUCTION OF PARTICULAR CONTRACTS AND IMPLIED CONDITIONS - SECURITY AND RETENTION FUNDS

CONTRACTS - BUILDING, ENGINEERING AND RELATED CONTRACTS - REMUNERATION - CERTIFICATES - FINALITY OF CERTIFICATE

The appellant (‘Synergy’) appeals against a decision of a judge declining to grant an injunction restraining the respondent (‘GSA’) from making any demand upon bank guarantees procured by Synergy in GSA’s favour in connection with the design and construction of a commercial building.

The judge accepted that there was a serious question to be tried in respect of Synergy’s contention that, by the time GSA foreshadowed making a demand upon the bank guarantees, it had come under a contractual obligation to return or release the guarantees.  The judge accepted that if the injunction were to be refused, Synergy was reasonably likely to suffer financial and related prejudice.  However, the judge considered that the bank guarantees were ‘risk allocation devices’ and that the preservation of the status quo entailed preservation of GSA’s right to avail itself of that risk allocation by making demand upon the guarantees notwithstanding the existence of a dispute about its obligation to return or release the guarantees.  The judge considered that the prejudice that Synergy would suffer was of a kind that was or ought to have been envisaged at the time the contract was entered into.

Held, allowing the appeal and granting an interlocutory injunction:

1.on the proper construction of the contractual arrangements, once GSA was required to return or release the guarantees, it followed that it was thereafter precluded from making a demand upon them, and their risk allocation function was at an end;

2.there were two bases upon which Synergy was able to demonstrate a serious question to be tried that GSA had come under an obligation to return or release the bank guarantees before any demand upon the guarantees had been foreshadowed and there was, therefore, a serious question to be tried as to whether GSA was precluded, by a negative stipulation, from having recourse to the bank guarantees;

3.in assessing the balance of convenience, the risk allocation role that the guarantees were intended to perform during the period for which GSA was entitled to hold them was relevant in assessing the prejudice GSA might suffer in the event that the injunction was granted;

4.however, the character of the guarantees in respect of bona fide claims made during the period GSA was entitled to hold the guarantees could not control the outcome of the balancing exercise required where there was a serious question to be tried that that period of time had come to an end, and nor could GSA’s entitlement to have recourse to the guarantees be taken to reflect the status quo when that entitlement was seriously disputed;

5.the prejudice to Synergy in the event that demand were to be made upon the guarantees was entitled to substantial weight and could not be devalued on the basis that it reflected the risk allocation in the contract;

6.      re-exercising the discretion, an interlocutory injunction should be granted.

Supreme Court Act 1935 (SA) s 50(5)(c), referred to.
Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 19; Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57; Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148; Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd (2008) 249 ALR 458; Daewoo Shipbuilding & Marine Engineering Co Ltd v INPEX Operations Australia Pty Ltd [2022] NSWSC 1125; Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159; Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812; House v The King (1936) 55 CLR 499; Ian Delbridge Pty Ltd v Warrandyte High School Council [1991] 2 VR 545; JG King Project Management Pty Ltd v Hunters Green Retirement Living Pty Ltd [2024] VSCA 310; Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd (2012) 28 BCL 226; Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd [2010] NSWCA 283; Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia (1998) 195 CLR 1; RCR O’Donnell Griffin Pty Ltd v Forge Group Power Pty Ltd (Receivers and Managers Appointed) (In Liquidation) [2016] QCA 214; Saipem Australia Pty Ltd v GLNG Operations Pty Ltd [2016] 1 Qd R 254; Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85; Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [2015] VSCA 98; Synergy Construct Australia Pty Ltd v GSA North Terrace Pty Ltd (Unreported, Supreme Court of South Australia, Associate Justice Bochner, 13 January 2025); Tomkins Commercial and Industrial Builders Pty Ltd v Majella Towers One Pty Ltd [2017] QSC 202; Urquhart Lindsay and Co Ltd v Eastern Bank Ltd [1922] 1 KB 318; Wood Hall Ltd v Pipeline Authority (1979) 141 CLR 443, considered.

SYNERGY CONSTRUCT AUSTRALIA PTY LTD v GSA NORTH TERRACE PTY LIMITED ATF GSA NORTH TERRACE UNIT TRUST
[2025] SASCA 72

Court of Appeal – Civil: Livesey ACJ, S Doyle JA and B Doyle AJA

1. THE COURT: The appellant (‘Synergy’) appeals against a decision of a judge declining to grant an injunction restraining the respondent (‘GSA’) from making any demand upon bank guarantees procured by Synergy in GSA’s favour in connection with the design and construction of a commercial building.[1]

   [1]     Synergy Construct Australia Pty Ltd v GSA North Terrace Pty Ltd (Unreported, Supreme Court of South Australia, Associate Justice Bochner, 13 January 2025) (‘Reasons’).

2. The judge accepted that there was a serious question to be tried in respect of Synergy’s contention that, by the time GSA foreshadowed making a demand upon the bank guarantees, it had come under a contractual obligation to return or release the guarantees.[2]  On appeal, the respondent made no challenge to that conclusion. 

   [2] Reasons [77].

3. The judge also accepted that if the injunction were to be refused, Synergy was reasonably likely to suffer the prejudice foreshadowed by its evidence on the application.[3]  However, the judge considered that the bank guarantees were ‘risk allocation devices’ and that preservation of the status quo entailed preservation of GSA’s right to avail itself of that risk allocation by making demand upon the guarantees notwithstanding the existence of a dispute about its obligation to return or release the guarantees.[4] 

   [3] Reasons [79].

   [4] Reasons [78].

4. On that basis, the judge considered that the prejudice that Synergy would suffer was of a kind that was or ought to have been envisaged at the time the contract was voluntarily entered into.  There was therefore no reason to grant an interlocutory injunction.[5]

   [5] Reasons [79].

5. The parties’ written submissions on appeal traversed a range of issues, but there was a substantial narrowing of the issues in the course of oral submissions.  The essential question is whether, having concluded that there was a serious question that GSA had come under an obligation to return the bank guarantees before it had made or foreshadowed a demand on them, the judge erred by treating their character as risk allocation devices as effectively controlling the availability of interlocutory injunctive relief and as neutralising the prejudice Synergy would suffer if the injunction were refused.

6. In our view, on the proper construction of the arrangements, it can be accepted that during the period in which GSA was entitled to hold the guarantees, they performed a risk allocation function.  That is to say, the guarantees were intended to operate not merely as security for the recovery of any proved claims or entitlements GSA had against Synergy.  They also entitled GSA to make demand upon the guarantees to satisfy any bona fide claim it had against Synergy, even though the demand might have been contested, and ultimately require determination by an arbitrator.  In this sense, Synergy was required (by the medium of the guarantees) to ‘pay now, argue later’.

7. However, on the proper construction of the contractual arrangements, once GSA was required to return or release the guarantees, it followed that it was thereafter precluded from making a demand upon them.  GSA could scarcely be entitled to make a demand upon a guarantee that it was obliged to return and release.  They were not intended to perform a risk allocation function once they were required to be returned.

8. As will be explained, there were two bases upon which Synergy was able to demonstrate a serious question to be tried that GSA had come under an obligation to return or release of the bank guarantees before any demand upon the guarantees had been foreshadowed.  There was, therefore, a serious question to be tried as to whether GSA was precluded, by a negative stipulation, from having recourse to the bank guarantees.

9. What was therefore required was a consideration of whether damages were an inadequate remedy and whether the balance of convenience favoured the grant of an injunction pending a final resolution of whether GSA had in fact been required to return or release the bank guarantees before it foreshadowed making demand upon them.

10. In considering that question, the risk allocation role that the guarantees were intended to perform during the period for which GSA was entitled to hold them was relevant in assessing the prejudice GSA might suffer in the event that the injunction was granted.  It was a consideration entitled to some weight, but in our view, the character of the guarantees in respect of bona fide claims made during the period GSA was entitled to hold them could not control the outcome of the balancing exercise required where there was a serious question to be tried that that period of time had come to an end.  Nor could GSA’s entitlement to have recourse to the guarantees be taken to reflect the status quo when that entitlement was seriously disputed.

11. The prejudice to Synergy in the event that demand were to be made upon the guarantees was entitled to substantial weight.  That prejudice could not be devalued on the basis that it reflected the risk allocation in the contract.  To conclude otherwise would be inconsistent with the conclusion that the applicant had demonstrated a serious question to be tried as to the availability of the final injunctive relief claimed.

12. In our respectful view, by treating the character of the bank guarantees during the period that GSA was entitled to hold them as effectively controlling the resolution of the balance of convenience, the discretionary exercise undertaken by the judge miscarried warranting a reconsideration on appeal of the application for interlocutory relief.[6]  Re-exercising the discretion, we would grant the interlocutory injunction sought.

    [6]     House v The King (1936) 55 CLR 499.

13. Our more detailed reasons follow.

    The contract

14. Synergy as ‘Contractor’ was engaged by GSA as ‘Principal’ to design and construct a building to house student accommodation on North Terrace, Adelaide.  The contract comprised the AS 4902-2000 General Conditions of contract for design and construct prepared by Standards Australia, together with annexures to the general conditions and a formal instrument of agreement signed by the parties on 27 November 2019.[7] 

    [7] Reasons [2].

15. Neoscape Pty Ltd (‘Neoscape’) was appointed the ‘Superintendent’ under the contract.  Its representative was Mr Paul Andolfatto.[8]  Pursuant to cl 20 of the general conditions, the role of the ‘Superintendent’ was to act fairly and reasonably in administering the Contract, and to do so as agent of GSA, the Principal. 

    [8] Reasons [11].

16. Under cl 5.1 of the general conditions, Synergy was required to provide the ‘security’ prior to it issuing its first progress claim in relation to the second ‘Separable Portion’ of work.  The contract relevantly defined the required security to be an approved unconditional assignable bank guarantee given by an approved financial institution or insurance company in an amount reflecting an agreed percentage of the ‘contract sum’.  However,  the parties later entered into a ‘Side Deed’ which, inter alia, permitted the security to be provided by three separate bank guarantees.

17. Of critical importance to the question whether GSA was obliged to return or release the guarantees, or was alternatively entitled to have recourse to them, is the relationship between, and the construction of, cll 5.2 and 5.4 (which concern recourse to and release of the bank guarantees), cl 37.4 (concerning the final payment claim and final certificate process) and cl 42 (concerning dispute resolution). 

18. Clause 5.2 provided as follows.

    5.2 Conversion and Recourse

    Security shall be subject to recourse by the Principal at any time:

    (a) where the Principal has become entitled to exercise a right under the Contract in respect of the security;

    (b) to satisfy any debt due and payable from the Contractor to the Principal under the Contract;

    (c) to satisfy any bona fide Claim the Principal may have against the Contractor; or

    (d) subject to any relevant stay under the Corporations Act 2001 (Cth), where an Insolvency Event has occurred in respect of the Contractor,

    provided that (in respect of the Security required by clause 5.1(b)) the Principal must give the Contractor at least 7 Business Days prior notice before exercising such right of recourse.

    The Principal may convert all or part of the security into cash at any time provided advance written notice is provided to the Contractor. The Principal may use the proceeds of the security in connection with any costs, expenses, losses or damages of any kind which the Principal has incurred or claims that it has incurred or might in the future incur in connection with what the Principal contends constitutes any act, default or omission of the Contractor.

    The Contractor must not take any steps to injunct or otherwise restrain:

    (e) any issuer of any unconditional undertaking provided under subclause 5.1 from paying the Principal pursuant to that undertaking;

    (f) the Principal from taking any steps for the purposes of making a demand under any such undertaking or receiving payment under any such undertaking; or

    (g) the Principal using the money received under any such undertaking.

    This clause 5.2 survives termination of the Contract.

19. It is plain from the language of cl 5.2 that GSA’s entitlement to have recourse to the bank guarantees (and the proceeds realised by making a demand on them) is triggered by the existence of a bona fide ‘Claim’ on its part against Synergy. 

20. As will be seen, in cases where the clause is less explicit about that matter, there is a constructional bias in favour of the conclusion that the entitlement of a beneficiary of a bank guarantee to have recourse to it is not conditioned upon that party having or demonstrating a legal right that is coextensive or coincident with the claim.  If a genuine dispute about the claim sufficed to throw into doubt the beneficiary’s right to have recourse to the bank guarantee, its function as a risk allocation device (as distinct merely from a form of security to guard against the contractor’s risk of insolvency) would be easily thwarted.  In the present case, however, cl 5.2 makes the position explicit.  The bank guarantees were explicitly risk allocation devices.

21. Indeed, cl 5.2 goes further and precludes Synergy from taking steps to restrain GSA from making a demand on the bank guarantee or using the money received as a result. 

22. However, that inhibition must be construed in light of any implied limitations upon it to be found in the other provisions of the general conditions and, relevantly, having regard to cl 5.4.  That clause provides:

    5.4 Reduction and release

    Upon the issue of the certificate of practical completion a party’s entitlement to security (other than in Item 14(e)) shall be reduced to the amount stated in Item 14(f) as applicable, and the reduction shall be released and returned within 14 days to the other party.

    The Principal’s entitlement to security in Item 14(d) shall cease 14 days after incorporation into the Works of the plant and materials for which that security was provided.

    A party’s entitlement otherwise to security shall cease 14 days after final certificate.

    Upon a party’s entitlement to security ceasing, that party shall release and return forthwith the security to the other party.

23. In our view, a harmonious construction of the provisions supports the conclusion that although cl 5.2 speaks of GSA having a right of recourse ‘at any time’, and precludes Synergy from seeking to restrain the exercise of rights under that clause, the rights and preclusions provided for in cl 5.2 assume that, at the relevant time, GSA remains entitled to retain, and has not come under an obligation to return or release, the bank guarantees. 

24. The obligation to release and return the bank guarantees 14 days after a ‘final certificate’ would be rendered nugatory if, notwithstanding that obligation, GSA could have recourse to it and use the proceeds in the manner contemplated by cl 5.2.

25. In form and substance cl 5.4 is in the nature of a negative stipulation.  Where it is engaged, there is an implied promise not to have recourse to the security because to do so would fundamentally undermine the obligation to release and return the security.

26. The process relating to the making of a final payment claim and certificate is governed by cl 37.4.  That clause provides:

    37.4 Final payment claim and certificate

    Within 28 days after the expiry of the last defects liability period, the Contractor shall give the Superintendent a written final payment claim endorsed ‘Final Payment Claim’ being a progress claim together with all other claims whatsoever in connection with the subject matter of the Contract.

    Within 15 Business Days after the earlier of:

    (a) receipt of the Contractor's final payment claim; or

    (b) if no final payment claim is received, the date falling 28 days after the expiry of the last defects liability period,

    the Superintendent shall issue to both the Contractor and the Principal a final certificate evidencing the moneys finally due and payable between the Contractor and the Principal on any account whatsoever in connection with the subject matter of the Contract.

    Within 5 Business Days after receipt by the Contractor of the final certificate, the Contractor shall deliver to the Superintendent a Deed of Release (Final Certificate) executed by the Contractor for the amount shown as finally due and payable in the final certificate.

    Subject to receipt by the Principal of the Deed of Release (Final Certificate) executed by the Contractor, those moneys certified as due and payable to the Contractor shall be paid by the Principal by the latest of:

    (c) the last day of the month following the month in which the final payment claim is made;

    (d) 2 Business Days after receipt by the Principal of a statutory declaration in a form acceptable to the Superintendent, stating that:

    (i)      all remuneration payable to employees of the Contractor has been paid;

    (ii)     all amounts payable to consultants, suppliers and subcontractors have been paid; and

    (iii)    the premiums for all insurance policies required to be effected under the Contract have been paid,

    during the period from date of commencement of any WUC to the date of the statutory declaration;

    (e) 2 Business Days after receipt of any other information referred to in subclause 37.1;

    (f) where the Contractor is required to issue a tax invoice, 2 Business Days after receipt by the Principal of that tax invoice; and

    (g) 2 Business Days after the receipt of the information referred to in subclause 38.1, if directed by the Principal.

    Those moneys certified as due and payable to the Principal shall be paid by the Contractor within seven days after the Contractor receives the final certificate.

    The final certificate shall be conclusive evidence of accord and satisfaction, and in discharge of each party’s obligations in connection with the subject matter of the Contract except for:

    (h) fraud or dishonesty relating to WUC or any part thereof or to any matter dealt with in the final certificate;

    (i) any defect or omission in the Works or any part thereof which was not apparent at the end of the last defects liability period, or which would not have been disclosed upon reasonable inspection at the time of the issue of the final certificate;

    (j) any accidental or erroneous inclusion or exclusion of any work or figures in any computation or an arithmetical error in any computation; and

    (k) unresolved issues the subject of any notice of dispute pursuant to subclause 42, served before the 7th day after the issue of the final certificate.

1. We return to the concept of the ‘last defects liability period’, which acts as the trigger for the making of a final payment claim, below.

2. Paragraph (k) of cl 37.4 of the general conditions refers to a notice of dispute under cl 42.  It is not necessary to reproduce that provision.  It provides that either party may, in the event of a ‘dispute’, including with respect to a ‘Superintendent’s direction’, give a written notice of dispute which adequately identifies and provides details of the dispute.  Clause 42.1 provides that notwithstanding the existence of a ‘dispute’, the parties shall, subject to cll 39, 40 and 42.4, continue to perform the contract.  Clause 42.2 provides for a conference between the parties.  Failing a resolution at that stage, the parties are to mediate pursuant to cl 42.2A.  If the dispute is not resolved by mediation, or not otherwise resolved within 60 days of the service of the notice of dispute, either party may refer the dispute to arbitration.  Notwithstanding this arbitration clause, cl 42.4 preserves a right of resort to litigation in particular circumstances.  It provides that:

   Nothing herein shall prejudice the right of a party to institute proceedings to enforce payment due under the Contract or to seek injunctive or urgent declaratory relief.

3. It was common ground between the parties that irrespective of whether the underlying disputes between the parties, including as to final injunctive relief, were the subject of arbitration, the Court retained jurisdiction to entertain the application for an interlocutory injunction.  We proceed accordingly.

   Practical completion and the ‘DLP agreement’

4. The Superintendent issued a certificate of practical completion for the works on 13 April 2022, certifying that practical completion occurred on 31 March 2022.

5. By reason of the first sentence of cl 5.2, there was a reduction in the face value of the bank guarantees held by GSA.  As reduced, GSA held three bank guarantees in the amounts of $700,000, $700,000 and $599,038.  These are the bank guarantees the subject of the application for final and interlocutory injunctive relief.

6. The certificate of practical completion also stated that the ‘defects liability period’ (‘DLP’) would expire on 31 March 2023.

7. When read with the relevant schedule, under cl 35 of the general conditions, the DLP for each separable portion was to commence at practical completion for that portion and continue for 12 months after that date and, for any defect which was rectified during the initial DLP, for a further 12 months, provided that the maximum aggregate DLP was to be 24 months.

8. The Superintendent had the task during the DLP of identifying a defect and its date for rectification.  If rectification was not commenced or completed as directed, GSA was entitled to have the work carried out by others and the cost incurred was to be certified by the Superintendent as moneys due and payable to GSA.

9. On 25 January 2023, the Superintendent’s Mr Andolfatto directed Synergy to rectify a defect described as blocked or obstructed sewer stacks.  The direction was ascribed the reference ‘SD-09’.  Synergy’s plumbing subcontractor maintained that the problem was not a defect in design or construction, but was caused by misuse by the building’s tenants.  Synergy agreed, however, to arrange for hydro-jetting of the sewer stacks.

10. In March 2023, Synergy commenced discussions with Mr Andolfatto about the return of the bank guarantees.  On 6 April 2023, a meeting occurred between representatives of Synergy and GSA and Mr Andolfatto at which there was discussion of the sewer stack issue.  An agreement was ultimately reached in terms recorded in an email, the relevant part of which is reproduced below.

    Summary of Bank Guarantees in GSA’s possession at present:

BG No.	Favouree	BG Value
675736	GSA North Terrace Pty Ltd atf GSA North Terrace Unit Trust	$700,000
675725	GSA North Terrace Pty Ltd atf GSA North Terrace Unit Trust	$700,000
675710	GSA North Terrace Pty Ltd atf GSA North Terrace Unit Trust	$599,038

Agreed steps as discussed:

At Synergy Construct’s completion of the following items (currently planned for the 12 May 2023):

Rectification of identified defects (list to be attached)

The hydro-jetting of the ten (10) sewer stacks previously identified to an acceptable level (inspection report to be issued by contractor confirming stacks have been cleaned and in as new condition, supported by provision of CCTV footage), and

Lucid providing a response to queries issued, confirming compliance (see attached email detailing queries)

GSA agree to direct the release of one $700,000 Bank Guarantee (either 675736 or 675725) on provision of Synergy Construct’s executed mutually agreed Deed of Release within 14 days.

a.     Three (3) months after the completion of the hydro-jetting of the ten (10) sewer stacks previously identified and release of the first Bank Guarantee, an inspection of sewer stacks will be undertaken. GSA will unconditionally direct the release of the remaining $700,000 Bank Guarantee (either 675736 or 675725) within 14 days.

b.     At the time the inspection report is received, Synergy and GSA will intend to agree a value of the remaining GSA risk items. If agreed by both parties, Synergy will obtain an alternate Replacement Bank Guarantee for the agreed value, to be swapped with the remaining Bank Guarantee (675710), leaving GSA in possession of the Replacement Bank Guarantee only.

GSA will then consider if it is appropriate to release the final Bank Guarantee (either 675710 or the Replacement Bank Guarantee) at an earlier date than six (6) months from date of completion of hydro-jetting works. If not released prior to six (6) months after the completion of the hydro-jetting of the ten (10) sewer stacks previously identified to an acceptable level, a further inspection of sewer stacks will be undertaken. If it is deemed that these findings do not identify any design or construction issues, GSA agree to direct the release of the remaining Bank Guarantee (either 675710 or the Replacement Bank Guarantee) within 14 days and no later than the end of the 2023 calendar year.

For clarity, the above is not an agreement to vary the rights and/or obligations under the Contract.

1. The parties referred to this as the ‘DLP agreement’, but they differed as to its effect and the extent to which it altered the ‘last defects liability period’ and thereby the date upon which a final certificate might issue, following which the obligation under cl 5.4 to return and release the bank guarantees might arise.

2. It is not necessary finally to resolve these issues.  However, if the DLP agreement was binding, and subject to the performance of its terms (and, perhaps, the outcome of that performance), the parties’ intention appears to have been to create a new regime for the release of the bank guarantees related to the occurrence of three milestones.  The quid pro quo for that accelerated and staged release regime appears to have been Synergy’s agreement to carry out hydro-jetting works even though it disputed that the sewer issues were the result of design or construction issues for which it was responsible.

3. The first milestone was the carrying out of the works planned for 12 May 2023.  Assuming completion of those steps, the parties’ apparent intention was that on the provision of Synergy’s ‘executed mutually agreed Deed of Release’, one of the $700,000 guarantees was to be released.[9]  

   [9]     As the judge noted, there is some room for debate about whether the deed was to be provided within 14 days after the relevant items were completed, with the bank guarantee to be released upon provision of the deed, or whether the bank guarantee was to be released on completion of the relevant items with the deed of release then to follow within 14 days.  The former appears to be the preferable construction, but we need not resolve that question.

4. The reference to a ‘Deed of Release’ is to be understood in light of the reference to such a deed in cl 37.4 of the general conditions and the form of deed poll set out in Part I to the Annexure to the general conditions.  As may be expected, that form contains relatively wide-ranging releases given by Synergy to GSA.

5. The second milestone was the carrying out of an inspection of the sewer stacks three months after the hydro-jetting works were complete.  On the face of it, the parties intended that the second $700,000 guarantee would then be released.

6. The DLP agreement contemplated that, once the inspection report was received, the parties might agree to a lesser value replacement guarantee in lieu of the remaining third guarantee.  It also contemplated that GSA might release the third or replacement guarantee before six months had expired after the hydro-jetting works. 

7. Ultimately, however, the third milestone was to arise six months after the hydro-jetting works.  If a further inspection carried out at that time was not ‘deemed’ to identify ‘any design or construction issues’, the third or replacement guarantee was to be released within 14 days and no later than by the end of the 2023 calendar year.

8. On the face of the DLP agreement, the retention or release of the bank guarantees appears to turn primarily upon the taking of progressive steps in relation to the sewer stacks.  As a result, it appears to contemplate the reduction and return of the guarantees sooner than would be required by cl 5.4 of the general conditions.  Under cl 5.4, the soonest that the guarantees would be required to be returned would be 14 days after the final certificate, which in turn would not occur until some time after the making of a final payment claim, which in turn could not occur until the expiry of the ‘last defects liability period’.  That period could not be known until shortly before the end of the initial DLP, albeit it could not be later than 24 months after practical completion.

9. It is true that the DLP agreement concluded with the words ‘[f]or clarity, the above is not an agreement to vary the rights and/or obligations under the Contract’.  But if the DLP agreement was to have any effect, it must have varied the contract to some extent.  Again, it is not necessary finally to resolve these questions, but a commonsense and a commercial construction of the DLP agreement might be that the terms of the contract were not intended to be varied except to the extent required by the DLP agreement.  On that basis, during the period whilst the bank guarantees were to be maintained by GSA under the DLP agreement, recourse could be had to them in the usual way.

10. The parties are in dispute about whether Synergy did all that was required in order to become entitled to the return of the guarantees according to the terms of the DLP agreement.

11. As to the first milestone, Synergy appears to have carried out the agreed hydro-jetting works in May 2023 as contemplated, and a CCTV inspection was carried out.  Synergy was not, however, prepared to agree to execute and provide a Deed of Release in the form set out in Part I to the Annexure to the general conditions.  At the time of its provision, GSA was to remain in possession of two guarantees.  Synergy took the position that it could not be expected to give releases which did not ‘carve out’ any rights it might have pending the release of those guarantees.  At all events, the first guarantee was not released.

12. It is not necessary to traverse in detail the parties’ subsequent negotiations about this issue, but they culminated in an exchange of emails in October 2023 which occurred in anticipation of the second inspection contemplated by the DLP agreement.

13. The position that was reached by 18 October 2023 is apparent from an email initially authored by Synergy’s Mr Michael Gramazio, responded to by Mr Andolfatto (designated below by underlined text) and further responded to by Mr Gramazio (designated below by italicised text).

    Hi Paul

    Thanks again to you and Darren for meeting on Wednesday, and for the follow up discussion you and I had yesterday.

    I understand from our meeting and discussions that Neoscape, as Superintendent, is comfortable that we have attended to the sewer stack blockages issue satisfactorily and that GSA is, therefore, now also more comfortable to move forward in closing out this issue and returning our security in exchange for our signed DOR. This is pleasing news, and we discussed high level that we would look to achieve this closeout over the next month.

    To move this forward, I propose the following process could be adopted:

    1.The Superintendent issues a written Direction to the Contractor that the requirements detailed in SD-09 have all been suitably addressed by the Contractor and that the Defect(s) identified in that Notice have all been rectified to the satisfaction of the Superintendent and the matter is closed.

    Neoscape will provide a response to address SD-09 and we are currently drafting a note recommending release of the securities to GSA.

    OK Noted 

    2.Based on the Superintendent issuing the above Direction, GSA agrees to release all BG security held back to the Contractor. In exchange the Contractor will provide GSA with a signed Deed of Release in the contract format with no amendment.

    GSA have verbally advised that they will commence arrangements to prepare for the release of securities, with the expectation that outstanding defects will be addressed and the Deed of Release will be signed in the contract format with no amendment, and issued at GSA at the time the securities are returned to Synergy.

    Agreed

    3.The exchange of the BG security and DOR will take place on or before Friday 3 November (i.e. in one month).

    As discussed, GSA verbally suggested that they will target release of securities as early as 3 November, but we anticipate it may take slightly longer. Following the subsequent agreement between GSA and Synergy relating to the sewer stacks, referencing the 3 monthly and 6 monthly inspections, the date for the second CCTV inspection would be following Friday, 3 November 2023. If we suggest two weeks to complete the works and obtain the report, that would be Friday, 17 November 2023. Neoscape will endeavour to confirm the date for release of securities at the earliest opportunity.

    Time is of the essence here for us. If we have to wait a few extra weeks, that can be accommodated, but we must expedite this as quickly as possible. I would suggest that 17 November be the drop dead date for all security exchanges for the contract DOR. Please confirm that Neoscape can facilitate this.

    From memory the BG security was being held by GSA’s representatives at CBA in Sydney. If this is still the case, these could be sent to a representative at CBA here in Adelaide or to Minter Ellison (GSA’s lawyers on this project) locally, and the exchange could take place at one of these locations with both Synergy and Neoscape in attendance. Alternatively, if GSA are in possession of the BGs they could provide them to Neoscape to facilitate the exchange here in Adelaide. If the BGs are still with CBA, GSA will need to give the bank suitable instruction to either send them to Adelaide or hand them to GSA in time to meet the exchange timeframe of 3 November.

    Noted.

    I would appreciate Neoscape confirming GSA’s acceptance of the above proposal by the end of the day next Friday.

    Apologies for the delay beyond Friday 13 October.

    Regarding the ponding on the roof, as previously advised we will attend to rectify this. Kenan has already made arrangements with a water proofer and they were aiming to meet on site today to inspect, with a view to having this addressed over the next week or two, so the matter is well in hand.

    Noted. Please advise date for completion of the works once confirmed.

    This work is in progress, and we will confirm when it is complete; it should not be longer than a week away.

    Thank you again for assisting in making this close out happen and I look forward to hearing from you before the end of next week.

    Regards,

    Michael

14. As matters transpired, by 22 November 2023, Mr Gramazio wrote to Mr Andolfatto complaining that GSA had still not returned the security.  He wrote that:

    To be clear, we are looking for all security to be returned in exchange for an unconditional deed of release.  I am not aware of any outstanding issues with Synergy; we are 100% closed out to the best of my knowledge.

15. On 24 November 2023, Mr Andolfatto provided to Synergy a draft report prepared by Mr Rogers of Hoare Lee based upon CCTV inspection footage.  The report suggested there had been observed issues with medium and high build ups in the vicinity of ‘aerators’ in some of the stacks sampled.  A concern was raised about the way in which the aerators were distorting liquid flow. 

16. By email dated 30 November 2023, Synergy’s Mr Kovacevic wrote to GSA and Neoscape providing and relaying responses to the gravamen of the Hoare Lee report.  At the risk of oversimplification, the effect of the email was that there were no design or construction issues with the sewer system including the aerators.

    Final payment claim and final certificate

17. On 5 December 2023, Synergy’s Mr Kovacevic wrote to Mr Andolfatto and GSA’s representatives in the following terms.

    Paul

    Further to our recent correspondence where we confirmed that the Contractor has fulfilled all obligations required under the Defect Liability Period, we hereby submit our ‘Final Payment Claim’ under clause 37.4 of the Contract for assessment by the Superintendent.  The attached claim and supporting information relates to amounts for previously disputed variations, which remain unresolved, as well as additional costs the Contractor has incurred over recent months in relation to the Contract. 

    Please assess and issue the final certificate as required under the Contract.

18. The lengthy schedule enclosed with that correspondence made a claim of $699,721.17.  Of particular relevance, it included a claim for $89,880 in relation to costs associated with the sewer stack cleaning and CCTV, noting that the claim was ‘disputed’.  It also contained a claim for $29,371.50 said to comprise additional costs associated with the ‘delayed release’ of the bank guarantees.

19. On 22 December 2023, Mr Andolfatto wrote to Synergy in the following terms.

    In accordance with clause 37.4 of the Contract please find attached:

    ·The Final Certificate inclusive of detailed breakdown.

    Please note that Synergy’s claimed values have been found to be invalid under the Contract, Neoscape have provided the associated justification for each item in the adjacent ‘Neoscape Comment’ column.

    Please also see attached Variation Directions responding to Synergy’s following variation submissions, for your records:

    ·PV102 – Fees payable on delayed release of DLP Bank Guarantees;

    ·PV103 – Cushman & Wakefield costs payable by Principal (sewer stack cleaning and CCTV; &

    ·PV104 – Professional Hours for Attendances by Builder, Subcontractors, Consultants and Legal Advisors in relation to Principal’s claims that sewer stacks are defective.

20. The enclosed ‘Final Certificate’ referenced cl 37.4 and certified that nil was payable by GSA to Synergy.  An attached detailed schedule responded to the line items in Synergy’s payment claim.

21. Relevantly to the claim that the sewer stack works were a variation for which Synergy was entitled to be paid, the Superintendent’s response stated:

    1.SD009 was directed pursuant to Clause 35 ‘Defects Liability’ which required GSA to rectify the affect of the defect at Synergy’s costs.  Synergy PV 103 incorrectly references 30.7 ‘Costs’ relating to costs in connection with Testing, which was not applicable to this SD009.

    2.Pursuant to Clause 36.5 ‘Notice of Variations’ if the Contractor is of the opinion that a direction given to the Superintendent is a variation even though it was not expressly identified as a variation by the Superintendent and the Contractor wishes to Claim in respect of the direction, then the Contractor shall within 7 Business Days of receiving the direction, notify the Superintendent of its opinion in writing and endorse that letter or notice ‘Notice of Variation’.  Neoscape have not received notification within the timeframe stipulated in Clause 36.5.

    3.SD009 does not request Synergy to vary the works, it is a rectification to the defect of builders debris identified within the sewer system, which was discussed as requiring hydro-jetting to act as a ‘reset’ of the entirety of the system to ensure it is performing at 100% capacity as intended.  This was an alternate to option to GSA backcharging the CCTV inspection works, debris removal and immediate hydro-jetting requirement at the time of blockage events.   

1. Relevantly to the claim associated with the delayed release of the bank guarantees, the Superintendent’s response stated:

   1.Insufficient information has been provided to support this claim.

   2.Based on the rectification of the ponding/waterproofing to the roof level, the extended DLP continues until as late as March 2024 and GSA will retain possession of the DLP BGs until such time, ie. 24 month following PC as per Annexure Part A, Item 32.  Therefore GSA are acting within the contract and Neoscape advise that Synergy’s claim for additional costs for the BG being held is invalid.

2. On 29 December 2023, Synergy issued a notice of dispute pursuant to cl 42.1 of the general conditions challenging the Superintendent’s assessment of its payment claims and GSA’s continued retention of the bank guarantees.  GSA responded on 15 January 2024 contending that the final payment claim was not valid and that, consequently, the final certificate was not a final certificate for the purposes of cl 37.4.  Accordingly, so it contended, the obligation to return or release the guarantees under cl 5.4 was not enlivened. 

3. GSA’s position is that the DLP would not expire until 31 March 2024 and it further advised that it was intending to have recourse to the guarantees to satisfy a claim against Synergy in respect of the sewer stack issues.  That led to the institution of these proceedings and the claim for interlocutory injunctive relief.

   These proceedings

4. Synergy filed an Originating Application in this Court on 3 April 2024.  By way of final relief, it sought declaratory relief and an injunction restraining GSA from making a written demand on the guarantees and requiring GSA to deliver the originals of the guarantees to Synergy.

5. By interlocutory application filed on the same day, Synergy sought an interlocutory injunction restraining GSA from making written demand upon the bank guarantees.

6. If the interlocutory injunction were to be granted, it would follow that GSA would remain in possession of the guarantees pending the final determination of the parties’ rights, but could not call upon them.  The bank guarantees themselves are unconditional and unlimited as to time.  That is to say, there was no prospect in this case[10] that the grant of an interlocutory injunction might see the guarantees expire before GSA’s right to have recourse to them is determined.

   [10]   The position was otherwise in Daewoo Shipbuilding & Marine Engineering Co Ltd v INPEX Operations Australia Pty Ltd [2022] NSWSC 1125 at [104]-[105] (Rees J).

   The parties’ contentions

7. Synergy contended that GSA was not contractually entitled to have recourse to the bank guarantees on two main bases.

   First, it contended that from 14 days after the issue of the Superintendent’s final certificate on 22 December 2023, GSA was obliged to return and release the guarantees by the operation of cl 5.4 of the general conditions.

   Secondly, it contended that it had done all that was required of it under the DLP agreement and that, whatever might have been its position in respect of the Deed of Release at an earlier stage, it had indicated a preparedness to provide an unconditional document upon the release of the three bank guarantees.  Whilst the third milestone depended on there being no design or construction issue identified with the sewer system, the fact was that GSA had not disputed the answers to the Hoare Lee report provided by Synergy’s 30 November 2023 email and nor had the Superintendent’s final certificate asserted any ongoing defect in respect of the sewer system.  In Synergy’s submission, whilst cl 5.4 required the release and return of the guarantees by no later than 14 days after the issue of a final certificate, there was no reason why the parties could not agree to the earlier release of the guarantees.[11]

   [11]   Synergy relied in this context upon observations made by Kennedy JA in JG King Project Management Pty Ltd v Hunters Green Retirement Living Pty Ltd [2024] VSCA 310 at [236]-[237].

8. Before the judge, GSA raised a number of responsive contentions to those two bases.

   With respect to Synergy’s reliance upon the ‘final certificate’, GSA contended that because the purported final payment claim was premature (in that it pre-dated the expiry of the last defects liability period), the Superintendent’s responsive certificate could not qualify as a ‘final certificate’ for the purposes of, and with the consequences provided for by, cl 37.4 of the general conditions.  Additionally it contended that the content of the certificate was inconsistent with it operating as a final certificate because it asserted that the defects liability period would extend until ‘as late as March 2024’.[12]  By way of response, Synergy contended that the certificate must be taken to have effect until validly challenged, and that because the Superintendent was agent for GSA, GSA is relevantly bound by the contractual consequences that flow from such a certificate.

   With respect to Synergy’s reliance upon the DLP agreement, GSA disputed the efficacy of that agreement, but also disputed that on its terms it entitled Synergy to a return of the guarantees.  As for the first milestone, Synergy had not provided an unconditional Deed of Release.  GSA contended that there were also other outstanding defects, including an issue with water ponding on the roof of the building, that were not rectified by the time of the first milestone. The release of a further guarantee at the second milestone pre-supposed compliance with the first.  The third milestone assumed the agreed absence of defects with the sewer system.  The Hoare Lee report had asserted the existence of defects.  

   [12]   GSA relied in this context upon observations made by Murphy J (with whom Fullagar and Vincent JJ agreed) in Ian Delbridge Pty Ltd v Warrandyte High School Council [1991] 2 VR 545 at 552.

9. This is not a complete or detailed statement of GSA’s contentions, but it suffices for present purposes. 

10. On the question of prejudice, Synergy led evidence to the effect that if the guarantees were called upon it would be required to pay the Commonwealth Bank of Australia (‘CBA’) the face value of the guarantees, and thus up to $1.99 million.  That represented about 20% of Synergy’s current working capital requirements, and would materially undermine and impact its ability to provide cashflow for its current projects and operations. 

11. Other possible consequences were identified including CBA reporting default or credit events to reporting agencies, which might lead to less favourable trading terms, placing further pressure on Synergy’s working capital requirements.  CBA might also review other existing facilities due to a higher perception of risk.  The evidence was to the effect that a strain on working capital and cashflow might also inhibit Synergy’s ability to tender for and win new work. 

12. Synergy proffered an undertaking as to damages.

13. For its part, GSA relied on evidence to the effect that it continued to hold serious concerns about the sewer stack system and that it considered that significant rectification works, potentially exceeding the value of the guarantees, may be required. 

    The Reasons

14. The judge’s reasons succinctly but comprehensively describe the relevant contractual provisions, the salient facts and the parties’ rival contentions.  In the course of describing GSA’s submissions, the judge observed:[13]

    The respondent argues that, generally, a court should not restrain the beneficiary of security from calling on that security, in the absence of fraud or demonstrably unconscionable conduct. Where an entitlement to have recourse to security is claimed in good faith, clear words will be required to support a construction of the contract which would prevent a beneficiary from having recourse to the security. Even where there is an arguable case of non-compliance by the beneficiary with the contract, the purpose for which the security was given will be determinative of whether an injunction should be granted. It submits that, where a contract contains an agreement by the party proffering the security, it is a decisive indicator that the purpose of the guarantee is a risk allocation device pending the overall resolution of the dispute between the parties. In this regard, the respondent relies on authorities such as Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd,[14] RCR O’Donnell Griffin Pty Ltd v Forge Group Power Pty Ltd (Receivers and Managers Appointed) (In Liquidation),[15] and Daewoo Shipbuilding & Marine Engineering Co Ltd v INPEX Operations Australia Pty Ltd.[16]

    The respondent says that, once a clause requiring the provision of security is characterised as a risk allocation device, the status quo is the maintenance of the agreement between the parties. If the parties have agreed as to where the risk should fall in the event of a dispute (and pending the resolution of that dispute), then that is the status quo: the parties are to be held to the bargain into which they entered.

    …

    The respondent argues that the characterisation of the guarantees as a risk allocation device is relevant to determining where the balance of convenience lies. Because the contract has itself allocated risk pending the determination of a dispute between the parties, the balance of convenience falls in favour of allowing the contract to take effect. The applicant has agreed to the respondent’s calling on the guarantees in the event of a bona fide claim: as a result, this is what should be allowed to happen.

    [13] Reasons [42]-[43], [48].

    [14] [2015] VSCA 98.

    [15] [2016] QCA 214.

    [16] [2022] NSWSC 1125.

15. The judge noted that Synergy accepted that the bank guarantees were, at least initially, intended to operate as risk allocation devices but that its contention was that, once the final certificate had been issued, GSA’s entitlements in respect of the guarantees came to an end.

16. The judge canvassed the parties’ arguments about the effect of the DLP agreement.  She concluded that:[17]

    Given the uncertainties in the DLP Agreement that I have enumerated, I consider that it is arguable that it is either unenforceable because the parties were never ad idem as to its terms, or it amounted to no more than an agreement to agree to a number of issues, or it was not complied with by the applicant at the first step, because it did not provide an executed deed of release to the respondent. I accept that the applicant has answers to all of these issues; I consider that all that is demonstrated is that there is a serious question to be tried in relation to them.

    In any event, I am unable to conclude that the applicant had a clear entitlement to the return of the guarantees at any time, nor that the defects liability period concluded on the 17 November 2023, thus allowing the applicant to issue the December Final Payment Claim when it did.

    Given these findings, I am also not satisfied that the applicant has established that the bank guarantees, while originally risk allocation devices, became mere performance bonds as a result of the DLP Agreement. This is not least because the DLP Agreement specifically provided that it did not vary the rights or obligations under the contract. Nor am I able to conclude that the DLP Agreement contained an express or implied stipulation that the respondent would not call on the guarantees even in the event that it was entitled to do so pursuant to subclause 5.4 of the contract. These are matters that must be resolved at trial.

    [17] Reasons [69]-[71].

17. Her Honour then turned to the parties’ contentions respecting the effect of the final certificate, before stating:[18]

    I consider that there is a serious question to be tried in relation to the validity of the December Final Payment Claim and the December Final Certificate, in the event that it is found that the defects liability period concluded on 31 March 2024.

    [18] Reasons [76].

18. The judge then concluded her analysis on these matters by observing as follows.[19]

    [19] Reasons [77]–[79].

    On the basis of this analysis, I consider that it is important to preserve the status quo between the parties while the disputes between them are resolved. Given that I have found that there is a serious question to be tried on:

    ·When the defects liability period came to an end;

    ·Whether the December (or indeed, the May) Final Certificate is valid;

    ·Whether the applicant was entitled to a return of any of the guarantees at any time; and

    ·Whether the nature of the bank guarantees changed from a risk allocation device to a performance bond by the DLP Agreement;

    I consider that the status quo between the parties is the position agreed under the contract: that the bank guarantees are a risk allocation device and that respondent is entitled to call on them pursuant to subclause 5.2 of the contract. In this regard, the words of Rees J in Daewoo Shipbuilding & Marine Engineering Co Ltd v INPEX Operations Australia Pty Ltd[20] are applicable:

    …The bank guarantee is a “risk allocation device”, providing a ‘pay now, argue later’ regime. As such, even assuming that Daewoo’s contention regarding “rework” and the expiry of the Warranty Period, and with it, INPEX’s right to hold the bank guarantee and call upon it, is arguable or even strongly arguable, it is certainly hotly contested. The contractual bargain of the parties is that, while this contest is resolved before an arbitral tribunal, INPEX gets to hold the money.[21]

    As to the balance of the convenience, I accept that there will be prejudice to the applicant if the respondent is allowed to call on the guarantees. While the respondent was critical of the applicant’s evidence in this regard, I accept that the prejudice foreshadowed by the applicant is reasonably likely to one degree or another. Nonetheless, this is the agreement that the applicant voluntarily made. The foreshadowed prejudice that the applicant will suffer if the respondent is allowed to call on the guarantees is no different to the prejudice that would have been envisaged at the time the contract was entered into. This is no reason to grant an interlocutory injunction in this matter.

    [20] [2022] NSWSC 1125.

    [21] [2022] NSWSC 1125 at [108].

19. Synergy’s appeal against the judge’s decision to refuse its application for an interlocutory injunction is as of right.[22]  A Justice of this Court granted an interim injunction in order to preserve the subject matter of the appeal.[23]

    [22]   Supreme Court Act 1935 (SA), s 50(5)(c).

    [23]   Synergy Construct Australia Pty Ltd v GSA North Terrace Pty Ltd (Unreported, Supreme Court of South Australia, Justice Stanley, 17 January 2025).

    Bank guarantees and interlocutory injunctions

20. As French CJ explained in Simic v New South Wales Land and Housing Corporation,[24] performance bonds, sometimes called bank guarantees, are typically issued by a financial institution at the request of one party to a contract in favour of another party pursuant to a requirement of the contract.  They take the form of a promise by the issuing institution that it will pay, to the beneficiary named in the bond, an amount up to the limit set out in the bond unconditionally or on specified conditions and without reference to the terms of the contract between the parties.[25]

    [24]   Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85.

    [25]   Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85 at [2].

21. The Chief Justice went on to observe:[26]

    The principles governing the legal effect and operation of performance bonds are similar to those applicable to letters of credit.  A letter of credit represents payment for the performance of an obligation.  A performance bond represents payment on default or in lieu of performance[27].  The commercial purpose of performance bonds, as described in Wood Hall Ltd v Pipeline Authority, is to provide an equivalent to cash[28].

    Two complementary principles apply to letters of credit and performance bonds alike — the principle of strict compliance and the principle of autonomy or independence.  According to the principle of strict compliance, a bank paying on a letter of credit or performance bond only has an obligation to do so and only has an entitlement to claim indemnity for the performance of that obligation if the conditions on which it is authorised and required to make payment are strictly observed.  A demand for payment cannot be accepted on the basis that near enough is good enough[29].  The principle of autonomy requires that the letter of credit or performance bond be treated as independent of the underlying commercial contract[30].  The principles of strict compliance and autonomy serve the immediate commercial purpose of such instruments of providing an equivalent to cash and the further purpose of performance bonds of allocating risk between the parties to the underlying contract until their dispute, if there be one, is resolved[31].

    [26]   Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85 at [5]-[6].

    [27]   McCracken et al, Everett and McCracken's Banking and Financial Institutions Law, 8th ed (2013) at 392 [11.001].

    [28] (1979) 141 CLR 443 at 445 per Barwick CJ, 453-454 per Gibbs J, 457-458 per Stephen J.

    [29]   Or on the strength of documents which are "almost the same, or which will do just as well":  Equitable Trust Co of New York v Dawson Partners Ltd (1927) 27 Ll L Rep 49 at 52 per Viscount Sumner.

    [30]   Ellinger, "The Doctrine of Strict Compliance:  Its Development and Current Construction", in Rose (ed), Lex Mercatoria:  Essays on International Commercial Law in Honour of Francis Reynolds, (2000) 187 at 187.

    [31]   McCracken et al, Everett and McCracken's Banking and Financial Institutions Law, 8th ed (2013) at 421 [11.330].

22. The autonomy principle operates as between the bank and the beneficiary or favouree.  It does not govern the position as between the parties to the underlying contract.  As French CJ explained:[32]

    The autonomy principle requires that the obligations of the issuing or accepting bank under the bond not be read as qualified by reference to the terms of the underlying contract[33].  That said, it does not prevent a party to a contract who procures the issue of a performance bond claiming as against the beneficiary that the beneficiary's action in calling upon the bond is fraudulent or unconscionable or in breach of a contractual promise not to do so unless certain conditions are satisfied[34].

    [32]   Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85 at [8].

    [33]   Urquhart Lindsay and Co Ltd v Eastern Bank Ltd [1922] 1 KB 318 at 322-323 per Rowlatt J; Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159 at 169 per Lord Denning MR; Wood Hall Ltd v Pipeline Authority (1979) 141 CLR 443 at 451 per Gibbs J.

    [34]   Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd (2008) 249 ALR 458 at 478 [77]-[78] and authorities there cited.

23. The well-known observations of Stephen J in Wood Hall Ltd v The Pipeline Authority (‘Wood Hall’)[35] were directed to the autonomy principle.  It was in that context that he observed that being ‘as good as cash’ in the eyes of those to whom it is issued is essential to its function, and that only if a guarantee is ‘as good as cash’ could it fulfil its commercial purpose.[36]  Stephen J had put to one side the case where a construction contract itself contains a qualification upon the owner’s power to make a demand under a performance guarantee.[37]

    [35] (1979) 141 CLR 443.

    [36] (1979) 141 CLR 443 at 457.

    [37] (1979) 141 CLR 443 at 459.

24. As Callaway JA (with whom Batt JA agreed) made clear in Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd (‘Fletcher Construction’),[38] whilst the effect on the lifeblood of commerce might be the same whether the bank is restrained from paying or the beneficiary is restrained from asking for payment, there is nevertheless an important difference between the two situations.  He observed:[39]

    In the former case the moving party seeks to prevent the bank from performing its contract; in the latter case the moving party seeks to prevent the beneficiary from breaching a provision of the underlying contract.  A moment’s reflection will show that the beneficiary, unlike the bank, may be restrained if there is an express prohibition in the underlying contract against calling upon the guarantee.  In theory an implicit or implied prohibition is just as good.  The practical problem is that it is much harder to establish.  That is not because of a requirement that an implicit or implied prohibition against calling upon a guarantee must be clear.  It is because the implication cannot be made if it would stultify, or even if it would be inconsistent with, the purpose for the which the guarantee was taken.

    …

    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. … 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. No implication may be made that is inconsistent with an agreed allocation of risk as to who shall be out of pocket pending resolution of a dispute and clauses in the contract that do not expressly inhibit the beneficiary from calling upon the security should not be too readily construed to have that effect. As I have already indicated, they may simply refer to the kind of default which, if it is alleged in good faith, enables the beneficiary to have recourse to the security or its proceeds.

    [38] [1998] 3 VR 812.

    [39] [1998] 3 VR 812 at 826-827.

1. That passage was referred to with approval by the Full Federal Court in Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd (‘Clough’).[40]After referring to the observations made in Wood Hall about the commercial currency of bank guarantees, French, Jacobson and Graham JJ said:[41]

   Nevertheless, the authorities have recognised three principal exceptions to the rule that a court will not enjoin the issuer of a performance guarantee, or bond, from performing its unconditional obligation to make payment. The exceptions were succinctly stated, with references to relevant authorities, by Austin J in Reed Construction Services Pty Ltd v Kheng Seng (Aust) Pty Ltd (1999) 15 BCL 158 at 164-165:

   First - the Court will enjoin the party in whose favour the performance guarantee has been given from acting fraudulently: see eg Wood Hall per Gibbs J (at 451). …

   Second - the party in whose favour the performance bank guarantee has been given may be enjoined from acting unconscionably in contravention of s 51AA of the TPA: Olex Focas Pty Ltd v Skodaexport Co Ltd [1998] 3 VR 380. On this point, different views have been expressed about the reach of s 51AA. …

   Third - the most important exception for present purposes, is that, whilst the Court will not restrain the issuer of a performance guarantee from acting on an unqualified promise to pay (Reed Construction Services at 164 per Austin J):

   … if the party in whose favour the bond has been given has made a contract promising not to call upon the bond, breach of that contractual promise may be enjoined on normal principles relating to the enforcement by injunction of negative stipulations in contracts.

   It may be preferable not to describe this as an exception but rather as an over-riding rule because it emphasises that the “primary focus” will always be the proper construction of the contract: Bateman Project Engineering Pty Ltd v Resolute Ltd (2000) 23 WAR 493 per Owen J at [30]. Stephen J recognised this in Wood Hall at 459 by observing that the provisions of the contract may qualify the right to call on the undertaking contained in a performance guarantee.

   [40] (2008) 249 ALR 458 at [79] (French, Jacobson and Graham JJ).

   [41] (2008) 249 ALR 458 at [77].

2. Their Honours emphasised that in determining whether, as a matter of construction, the contract between the owner and contractor imposes relevant limitations upon the owner’s right to make demand upon a bank guarantee, the broader commercial context is relevant.  They said:[42]

   [42] (2008) 249 ALR 458 at [81]-[83], [85].

   In determining whether the underlying contract confers an unfettered right to call upon the performance guarantee, the importance of such instruments in the construction industry, both nationally and internationally, is a factor which bears upon the question of construction of the Contract. A number of authorities support this proposition:

   (1)In Wood Hall Ltd at 457-458, Stephen J referred to English authority which described the performance guarantee as standing on a similar footing to a letter of credit.

   (2)In the passage from the judgment of Callaway JA in Fletcher Construction at 827 quoted above, his Honour emphasised the importance of commercial practice in construing the contract. The reference in the judgment of Charles JA at 822 to the passage from Hudson's Building and Engineering Contracts, is to similar effect.

   (3)In Bachmann, Brooking JA referred at [51] to the practice in the United States. He said that the generally accepted view in that country is that standby letters of credit (and hence, performance guarantees) are intended by the parties to the underlying contract to require the supplier or contractor to:

   … stand out of the amount of the credit in favour of the buyer pending resolution of the underlying dispute.”

   (1)This approach is supported by the observations of Hobhouse LJ in Toomey v Eagle Star Insurance Co Ltd [1994] 1 Lloyd's Law Rep 516 at 520, that parties to a commercial contract are to be taken to have contracted against a background which includes the earlier authorities on the construction of similar contracts.

   Notwithstanding the importance of commercial practice, the statements in these authorities do not suggest that the Court should depart from the task of construing the terms of the contract in each case. What the authorities emphasise is that the commercial background informs the construction of the contract. In particular, as Callaway JA said in the passage quoted above, the Court ought not too readily favour a construction which is inconsistent with an agreed allocation of risk as to who is to be out of pocket pending resolution of the dispute about breach.

   It follows that clear words will be required to support a construction which inhibits a beneficiary from calling on a performance guarantee where a breach is alleged in good faith, ie, non-fraudulently. This view is also supported by the remarks of Charles JA in Fletcher Construction at 820-821.

   …

   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: …  It also accords with the approach taken to the construction of the underlying contract in the leading authorities to which we have referred: …

3. That each contract must be construed in order to ascertain the commercial purpose to be served by the provision of bank guarantees is illustrated by the decision of the New South Wales Court of Appeal in Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd (‘Lucas Stuart’).[43]  In that case, the Court considered that, properly construed, the owner’s right to call on the guarantees turned upon objective circumstances, and not upon the owner’s bona fide assertion that those circumstances had occurred.  Macfarlan JA, with whom Campbell and Young JJA substantially agreed on this issue, said that:[44]

   There are at least two principal goals that parties may seek to achieve by requiring that performance bonds be provided by a contractor to a principal in circumstances such as the present.

   One is to provide security in the event of the insolvency of the contractor. The other is to enable the principal to obtain prompt payment of amounts it claims, notwithstanding disputes raised by the contractor. Not every contract seeks to achieve both goals. The present is one in which only the first is sought to be achieved. To assist in achieving the first goal the Contract thus states that the bonds to be provided are to be “unconditional”, with the consequence that the issuer is obliged to pay, without argument, if called upon by the respondent to do so.

   So far as the second goal is concerned, Clause 16.2 however only entitles the respondent to call upon the bonds if, as a matter of objective fact, the applicant “has not materially complied with its obligations”. Accordingly, it is open, as has occurred here, for the applicant to seek to restrain the respondent from calling upon the bonds upon the basis that the pre-condition has, at least arguably, not been satisfied.

   The position would have been different if Clause 16.1 had made the respondent’s entitlement to call upon the bonds dependent on the respondent’s satisfaction or even simply upon the respondent’s assertion that the applicant was in breach of the Contract. Provisions of this type would have gone a long way to achieving the second of the goals to which I have referred above.

   [43] (2012) 28 BCL 226; [2010] NSWCA 283.

   [44] (2012) 28 BCL 226; [2010] NSWCA 283 at [39]-[42].

4. The decisions in Fletcher Construction, Clough and Lucas Stuart were referred to in Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd (‘Sugar Australia’).[45]  In that case, the Victorian Court of Appeal considered that the primary judge erred by failing to reach a concluded view as to the proper construction of the provision which conferred a right on the owner to have recourse to the bank guarantees.  Undertaking that exercise on appeal, the Court concluded that whilst there was a serious question to be tried that in respect of some monetary claims the owner’s proposed recourse was not permitted under the contract, there was not a serious question to be tried with respect to the owner’s right of recourse to the extent of approximately $2 million.  Ultimately, in circumstances where some financial reputational harm would be caused by the owner having recourse to the guarantees to that extent, the balance of convenience did not favour an injunction with respect to recourse beyond that amount.

   [45] [2015] VSCA 98.

5. As might be expected, in addition to these intermediate appellate decisions, there is a significant number of first instance decisions involving the grant or refusal of interlocutory injunctive relief to restrain a party having recourse to a bank guarantee given pursuant to a building contract.  The parties emphasised aspects of many of these decisions in the course of argument before the judge and, to some extent, on appeal. 

6. Many of the authorities refer to the importance of the circumstance that a bank guarantee may be intended to operate as a risk allocation device.  However, that is not to say that applications for injunctive relief in this context are determined by posing the question, at a level of abstraction, whether the bank guarantees were ‘risk allocation devices’.  The fact that an injunction is sought in respect of recourse to a bank guarantee does not mean that the injunction is to be determined according to some different body of principles.  On the contrary, the ordinary principles apply.   

7. Where an interlocutory injunction is sought on the basis of an assertion that the respondent would be acting in contravention of an express or implied negative promise not to present a bank guarantee in the circumstances that have occurred, the applicant for relief must demonstrate:

   (1)a serious question to be tried with respect to the availability of final relief of a kind which may be rendered nugatory if interlocutory injunctive relief is not granted.[46]  In a case such as the present, that requires demonstrating a serious question to be tried that GSA will ultimately be permanently restrained from having recourse to the bank guarantees on the basis that GSA would be in breach of contract by doing so.  Such an injunction invokes equity’s auxiliary jurisdiction, with the result that the applicant must demonstrate a serious question to be tried that damages would be an inadequate remedy for the breach of contract sought to be restrained;[47] and

   (2)that the balance of convenience favours the grant of an injunction.[48]  This involves weighing the prejudice to the applicant if the status quo is not preserved, and the prejudice to the respondent if the injunction is granted.  Relevant to the latter will be the proffering of an undertaking as to damages and its worth.

   [46]   Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199 at [8], [15]-[17], [19] (Gleeson CJ).

   [47]   Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd (2012) 28 BCL 226; [2010] NSWCA 283 at [6]-[9] (Campbell JA), [45]-[46] (Macfarlan JA).

   [48]   Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148 at 153 (Mason ACJ), Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia (1998) 195 CLR 1 at [21] (Brennan CJ, McHugh, Gummow, Kirby and Hayne JJ).

8. The inquiry whether there is a serious question to be tried in this context involves considering whether there is a prima facie case in the sense that the applicant has demonstrated a sufficient likelihood of success to justify in the circumstances the preservation of the status quo pending the trial.[49]

   [49]   Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57 at [65], [70] (Gummow and Hayne JJ).

9. The required strength of the probability of ultimate success may depend on the nature of the rights asserted and the practical consequences likely to flow from the interlocutory order sought.[50]  The extent to which it is necessary or appropriate to examine the legal merits of an applicant’s claim for final relief, when determining whether to grant an interlocutory injunction, will depend on the circumstances of the case; there is no inflexible rule.[51]  Where the grant of an interlocutory injunction will be effectively dispositive of a material part of the claim, the applicant confronts a heavy onus. [52]

   [50]   Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57 at [71] (Gummow and Hayne JJ).

   [51]   Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199 at [18] (Gleeson CJ).

   [52]   Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [2015] VSCA 98 at [33] (Osborn and Ferguson JJA).

10. In many of the instances in which courts have characterised the bank guarantee required to be provided under contract as a ‘risk allocation device’, that characterisation has been made for the purpose of, or in the course of, construing the contract in order to determine whether there is a serious question to be tried with respect to whether the owner was disentitled from having recourse to the guarantee.[53]

    [53]   In Tomkins Commercial and Industrial Builders Pty Ltd v Majella Towers One Pty Ltd [2017] QSC 202, the construction favoured by the Court meant that the recourse provision in that case operated so as to provide security for default for non-payment but was not a risk allocation device in relation to who should be out of pocket pending resolution of a dispute resulting from the giving of a notice of dispute in response to an amount certified in a final certificate. In reaching that conclusion (at [101]), Brown J distinguished the different contractual provisions in Sugar Australia and Saipem Australia Pty Ltd v GLNG Operations Pty Ltd [2016] 1 Qd R 254.

11. Thus, in Fletcher Construction, when Charles JA identified the ‘critical question’ as being whether the provision of a guarantee under the contract was not merely to provide security but also ‘to [make] provision for an allocation of risk … showing which party was to be out of pocket pending resolution of any dispute’,[54] this was in the context of resolving whether the right of recourse under the contract was conditioned on an actual contractual entitlement (objectively assessed), or a genuine claim to such an entitlement (even if disputed).  Concluding that the bank guarantees were intended as a risk allocation device pending a dispute about entitlement, his Honour held that the mere fact that there was a genuine dispute about entitlement did not amount to a ‘serious question to be tried on the issue whether [the respondent] is now entitled to call on the letters of credit’.[55]

    [54] [1998] 3 VR 812 at 821.

    [55] [1998] 3 VR 812 at 821.

12. Similarly, in Clough, the Full Federal Court’s conclusion that the guarantees were intended to operate as risk allocation devices was reached as part of its conclusion that the right of recourse was conditioned on nothing more than a bona fide claim.  In so concluding, the Court upheld the view of the primary judge on that question who had consequently held that there was not a serious question to be tried with respect to the appellant’s right to restrain the respondent from having recourse to the guarantees.

13. In Sugar Australia, the potential that, on the proper construction of the contract, the bank guarantee was intended to operate as a risk allocation device was seen to be a reason why, in the circumstances of that case, the question of the construction of the contract was one which should be decided in the course of determining whether to grant an interlocutory injunction. 

14. Osborn and Ferguson JJA made the point that if the question were left unresolved, and an injunction granted, this would have 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.[56]  On appeal, the Court embarked on a resolution of the proper construction of the relevant provisions and found that, properly construed, recourse to the guarantees could be had where the owner was ‘acting reasonably’ (judged at the relevant time), and that this did not require the owner to demonstrate on some objective basis that its claim was reasonable, nor that it was a claim in respect of a liability incurred or cost or expense already paid.[57]  Once the clause was construed, the Court was then able to assess whether and to what extent there was a serious question to be tried that, in particular respects, the appellant’s proposed recourse exceeded its contractual entitlements.

    [56] [2015] VSCA 98 at [35].

    [57] [2015] VSCA 98 at [129]-[149] (Kaye JA, Osborn and Ferguson JJA agreeing).

15. In their reasons, Osborn and Ferguson JJA observed that:[58]

    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.

    [58] [2015] VSCA 98 at [31].

16. There was no question, in that case, about whether the owner had come under some supervening or overriding obligation to return or release the guarantees.  Their Honours’ observations about the status quo relevantly entitling the owner to exercise the guarantees were on the premise that the construction contended for by the owner was preferred (as indicated by the words ‘if it be the case that the commercial purpose of the performance bond was to allocate risk pending final determination of the dispute’). 

17. Those observations are not authority for a proposition that where bank guarantees are to operate as risk allocation devices under a construction contract during the period prior to their required release, that characterisation dictates the outcome of the balance of convenience inquiry arising upon demonstration of a serious question to be tried that the guarantees were required to be released prior to the owner’s proposed recourse.

18. To the extent that the observations of Rees J in Daewoo Shipbuilding & Marine Engineering Co Ltd v INPEX Operations Australia Pty Ltd (‘Daewoo Shipbuilding’)[59] might suggest that the characterisation of the guarantees as a risk allocation device means that an injunction must be refused notwithstanding a serious question to be tried as to the owner having been required to return or release the guarantees, we respectfully disagree.

    [59] [2022] NSWSC 1125 at [108].

19. Such a proposition would be inconsistent with a faithful application of the general principles that must govern an application for an interlocutory injunction.  In a case in which there is a serious question to be tried that to have recourse to the guarantee would contravene a negative stipulation, the court must weigh the competing risks of injustice.  In a case like the present, the risk of injustice to Synergy is that although there is a seriously arguable case that GSA is not entitled to have recourse to the guarantees, the refusal of the injunction will leave GSA at liberty to do so, with adverse financial and reputational consequences for Synergy. 

1. The risk of injustice to GSA, if the injunction is refused, is that it may be deprived of a ‘pay now, argue later’ benefit (to which it might ultimately be found to have been entitled) in relation to its claim regarding works that need to be carried out on the sewer stack system, at least until the question of whether the guarantees have to be resolved is finally determined.  It will not, however, lose the security benefit of the guarantees if an injunction is granted, because the guarantees in this case, unlike in Daewoo Shipbuilding, are not time-limited on their face.[60]

   [60] [2022] NSWSC 1125 at [104]-[105].

2. In this way, the character of the guarantees as risk allocation devices forms part of a consideration of the risk of prejudice to GSA, but only in the sense that it has to be recognised that if it should finally be determined that GSA had not come under an obligation to return or release the guarantees, it will have been deprived of reliance upon an important commercial feature of the guarantees.[61]

   [61]   Or, as Philip McMurdo JA (with whom Applegarth J agreed) put it in RCR O’Donnell Griffin Pty Ltd v Forge Group Power Pt Ltd (Receivers and Managers Appointed) (in liq) [2016] QCA 214 at [97]: ‘A court hearing an interlocutory inunction would have been alert to the risk that if the Principal was to be enjoined from having recourse to the security, pending resolution of the dispute as to whether it was entitled to do so, the benefit to the Principal of the security could be substantially diminished’.

3. The risk allocation function of the guarantees cannot control or dictate the outcome of the Court’s consideration of the balance of convenience, nor can it conclusively determine the status quo in some limiting way, when the very issue about which a serious question arises is whether that function had come to an end.

4. In our respectful view, the judge erred by elevating the risk allocation function of the guarantees during the period that GSA was entitled to maintain possession of them to the status of a decisive or controlling consideration in the weighing of the balance of convenience.  In our view, that involved an error of approach which vitiates the decision to refuse interlocutory injunctive relief, requiring that we reconsider for ourselves whether the injunction should be granted.

   Disposition

5. GSA did not dispute that if the final certificate was relevantly valid, the obligation to return and release the guarantees under cl 5.4 meant that it was not entitled to have recourse to the guarantees in the manner proposed.  In our view, that was a proper concession: once GSA was obliged to return and release the guarantees, there was an implied negative stipulation precluding recourse to the guarantees.

6. GSA also did not dispute, on appeal, that there was a serious question to be tried that it had come under an obligation to return and release the guarantees.  There was no notice of contention to the effect that the judge erred in so concluding.

7. That being said, in re-evaluating whether an interlocutory injunction should be granted, it is appropriate to make at least a preliminary assessment of the strength of the prima facie case.  We have summarised the two alternative pathways by which Synergy argues that GSA had become obligated to return and release the guarantees. 

8. As to the first, as we have observed, there was no dispute on appeal that if the obligation under cl 5.4 of the general conditions to return and release the guarantees was engaged, GSA was not entitled to have recourse to the guarantees.  It was also not disputed that there was a serious question to be tried that, by reason of 14 days having passed after the issue by the Superintendent of a document which described itself as a final certificate, the obligation to return and release the guarantees had arisen prior to any purported act of recourse by GSA.  In our view, whilst there is room for debate about whether, in view of the actual content of the final certificate, and the competence of the final payment claim that preceded it, the certificate can be treated as triggering the obligations in cl 5.4,[62] GSA was correct not to dispute, on appeal, that Synergy has demonstrated a serious question to be tried that the obligation to return and release the guarantees arose 14 days after the certificate was issued.

   [62]   A similar, but not identical, question was considered in Tomkins Commercial & Industrial Builders Pty Ltd v Majella Towers One Pty Ltd [2017] QSC 202 at [95]-[103] (Brown J).

9. As to the second, the judge did not in terms resolve whether there was a serious question to be tried that by reason of the independent operation of the DLP Agreement, GSA had come under an obligation to release the guarantees, and had thus become subject to a corresponding preclusion against having recourse to them. 

10. In our view, there is a serious question to be tried on this issue.  The apparent purpose of the DLP agreement was to facilitate the progressive return of the three bank guarantees sooner than was otherwise contemplated by the contract, so long as Synergy undertook certain works and so long as testing was carried out which did not identity ongoing design or construction issues.  Whilst there is debate about whether, in fact, design or construction issues were identified by the Hoare Lee report and, if so, whether the subsequent issue of a final certificate which contained no finding or assertion that there were outstanding design and construction issues involved a deeming that there were no such issues, Synergy has a reasonably arguable claim that the DLP agreement was substantially performed so as to require GSA to return and release the three guarantees.

11. Because there are, in effect, two independent pathways to a conclusion that GSA was precluded from having recourse to the guarantees, each of which gives rise to a serious question to be tried, in our view, Synergy can be said to have prospects of success sufficient to justify what will amount to a denial to GSA of the benefit of a risk allocation device in the event that both of Synergy’s arguments ultimately fail.

12. Essentially, for the reasons given by the majority in Lucas Stuart, we would also accept that there is a serious question to be tried with respect to the availability of permanent injunctive relief on the footing that damages for breach of a negative stipulation are not likely to be adequate to compensate for the reputational harm that might be caused by recourse to the guarantees.[63]

    [63]   Lucas Stuart at [9] (Campbell JA), [45] (Macfarlan JA).

13. Turning to the balance of convenience, there is no reason on appeal not to accept that Synergy is likely to suffer prejudice of the kind described earlier if an injunction is refused. 

14. We would acknowledge that because the guarantees were, for a period of some years, intended to perform a risk allocation function, Synergy can be expected to have appreciated the likely financial and reputational consequences that might follow if the guarantees were called upon in connection with the building project.  In that general sense, it might be said that recourse to the guarantees would entail a kind of prejudice which was always on the cards.  We do not, however, think that this detracts much from the prejudice that would in fact be caused if the guarantees are now the subject of a demand.  The relevant prejudice which is now in prospect involves recourse to the guarantees after the issue of a final certificate, and in circumstances where it is reasonably arguable that the DLP agreement has been complied with.  A risk of prejudice of that kind cannot be said to have been voluntarily assumed by Synergy even if, in a general sense, the consequences of recourse to bank guarantees were foreseeable from the outset. 

15. GSA did not point to any specific prejudice.  Its prejudice is that it will not be in a position to have recourse to the guarantees until the question of whether they were obliged to be returned is finally resolved.  Conceivably that question may be resolved before any underlying dispute about the sewer stack is resolved.  As well, because the guarantees are not intrinsically time-limited,[64] if GSA ultimately prevails on the question of recourse to the guarantees, they will still be available to perform the function of providing security for GSA’s claims (if those claims are ultimately made good).

    [64]   cf. Daewoo Shipbuilding at [104]-[105] (Rees J).

16. Any financial prejudice suffered by delay in accessing funds that GSA might suffer will be claimable against Synergy by reason of its undertaking as to damages.  GSA did not contend that the undertaking was without substance.

17. In our view, whilst there are plainly competing risks of injustice whichever course is adopted, the balance of convenience favours the grant of an interlocutory injunction. 

18. We would allow the appeal and grant an interlocutory injunction restraining GSA from having recourse to the guarantees.  We will hear the parties as to the precise terms of the injunction, and as to the costs of the appeal.