Thiess Pty Ltd v Pacific National (Victoria) Pty Ltd
[2009] VSC 670
•22 July 2009
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
LIST B
No. 7859 of 2009
| THIESS PTY LTD | Plaintiff |
| V | |
| PACIFIC NATIONAL (VICTORIA) PTY LTD | Defendant |
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JUDGE: | JUDD J | |
WHERE HELD: | Melbourne | |
DATE OF RULING: | 22 July 2009 | |
CASE MAY BE CITED AS: | Thiess Pty Ltd v Pacific National (Victoria) Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2009] VSC 670 | |
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GUARANTEE AND INDEMNITY – Unconditional performance bond – Injunction – Balance of convenience – Reputation
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr P Corbett | Minter Ellison |
| For the Defendant | Mr S Minahan | Logie-Smith Lanyon |
HIS HONOUR:
This is an application by summons dated 21 July 2009 by Thiess Pty Ltd, the plaintiff in a proceeding brought against Pacific National (Victoria) Pty Ltd by writ dated 21 July 2009. The application and the proceeding are brought because the defendant called upon a bank guarantee, in the nature of an unconditional performance bond, procured by the plaintiff pursuant to an obligation under an Access and Occupations Agreement, dated 25 June 2002. The parties to the agreement were the defendant, previously known as Freight Victoria Limited and the plaintiff in joint venture with ALSTOM Australia Limited.
The purpose of the Access and Occupations Agreement was to permit the joint venture partners to carry out certain works on the rail corridor between Melbourne and Geelong. The defendant leased the below rail assets from the Director of Public Transport and also operated an above rail freight business. The works were completed by 6 April 2006.
Following completion of the works, some defects were identified in a tricolour LED train signal which required rectification. The defendant alleges that the rectification works caused disruption to the freight services. On 2 February 2009, after the plaintiff had requested the defendant to return the guarantee, the defendant sent to the plaintiff an invoice for $433,730 for costs incurred by it due to disrupted rail services. The covering letter alleged that during the period 29 June 2007 to 9 March 2008 the plaintiff occupied the Geelong line to undertake rectification works. The plaintiff claimed that the occupation was not a “Track Occupation” as defined in the agreement, but a “Track Occupation Overrun”, causing delay for which the plaintiff was liable.
The plaintiff responded by letter dated 6 February 2009 denying any liability and pointing out that its occupation of the track had been agreed to by V/Line Passenger Pty Ltd which by then owned the below rail assets. The plaintiff also argued that there was no “Track Occupation Overrun”. It also sought an undertaking that no demand or call would be made on the guarantee. The defendant did not respond to the letter and no such undertaking was given. On 6 July 2009, without notice to the plaintiff, the defendant called on the guarantee in the sum of $216,685, which sum was duly paid by the bank issuing the guarantee.
The plaintiff seeks an interlocutory mandatory injunction requiring the defendant to repay the amount recovered under the bank guarantee on condition that a substitute guarantee would be provided to the defendant but which could not be called upon until the hearing and determination of the proceeding or further order.
The evidence in support of the application is an affidavit of Jason Jeffrey Spears sworn on 21 July 2009. Mr Spears describes the background agreements, the work that was carried out, the defect that apparently underlies the claim made by the defendant, the correspondence and the demand for payment by the defendant when calling upon the guarantee. Mr Spears also deposes to the damage to the plaintiff's reputation by reason of the conduct of the defendant in calling upon the guarantee. He deposed:
39.The plaintiff is a wholly owned subsidiary of Leighton Holdings Limited and is one of Australia’s largest civil and engineering contractors, carrying on business in the areas of construction, mining contracting, civil contracting, tunnel projects, rail projects and multi-disciplinary service provision.
40. The plaintiff has an annual turnover of approximately $5.5 billion.
41.Virtually all construction contracts to which the plaintiff is a party require it to lodge security in favour of the other contracting party, to secure the plaintiff’s performance under the relevant construction contract. This security is normally provided in the form of irrevocable and unconditional bank guarantees. Sometimes the security is provided in the form of irrevocable and unconditional insurance bonds issued by an insurance company.
42.I am advised by Don Argent, Director, Finance and Administration and believe that the plaintiff currently has approximately $758 million in security in the form of bank guarantees and insurance bonds, in the market place.
43.The plaintiff has a market reputation as a reliable engineering and construction contractor. It has built its business and its market reputation by meeting its contractual obligations. This means completing its obligations without the other contracting party being required to resort to the performance security it has provided.
44.I am advised by Don Argent and believe that since 1984, despite the hundreds of projects in which the plaintiff has provided bank guarantees or insurance bonds, only two calls have been made on bank guarantees or insurance bonds provided by the plaintiff.
45.The first, which was called in Western Australia, is currently the subject of litigation in that State as the plaintiff denies its contractual liability for the matters the subject of the call.
46.The second is the Bank Guarantee called by the defendant, which is the subject of these proceedings.
47.In my experience a contractor’s bank guarantee history (in the sense of whether any of its guarantees have ever been cashed) is an extremely important part of the contractor’s reputation and is taken into account:
(a)by prospective clients, especially Government departments and statutory corporations, when considering tenders submitted by the contractor for work; and
(b)by banks, financial institutions and insurance companies, when assessing the size and terms of a bank guarantee facility or insurance bond facility which they may agree to make available to the contractor.
48.A call on a bank guarantee provided to a rail access provider concerning a rail project in the State of Victoria involves even more reputational damage. In the vicinity of $5 billion in rail project work has been announced by the State of Victoria as part of its Victorian Transport Plan and that work will be tendered by the State in the next three to twelve months. The vast majority of that work will require the successful contractor to obtain rail occupations from rail access providers.
49.The reputation of prospective contractors in meeting their contractual obligations to access providers is thus an even more important reputational issue at this time.
50.I believe that if the funds the subject of the plaintiff’s Bank Guarantee are not promptly restored irreparable damage will be done to the plaintiff’s reputation as its clients, rail access providers, banks, financiers and insurance companies may question the plaintiff’s attitude and ability to meet its current and future contractual obligations. If the funds the subject of the Bank Guarantee are restored promptly, then this will minimise any damage to the plaintiff’s reputation.
The defendant submitted that there is no basis for the injunction sought and seeks to have the application dismissed. No material was filed on behalf of the defendant and no application was made on its behalf for additional time within which to file material. The defendant submitted that the obligation under the performance bond, in the context of the agreements between the plaintiff and defendant, reflected a sharing of risk and liability. It was not necessary for the defendant to wait until its claims were resolved before making a valid demand for payment. The defendant’s right to call for payment was subject only to the qualification that it act bona fide. There was no need for more than a claim which was genuinely advanced in order to justify a call upon the bank for the amount payable.
The defendant relied upon the well-known authorities in relation to performance bonds, including Wood Hall Limited v The Pipeline Authority,[1] to contend that such obligations must be as good as cash and deprived of that quality it is deprived of its commercial currency. That does not mean, of course, that such a guarantee may be called upon at the whim of the beneficiary. In order to determine the circumstances under which a demand may be made it is necessary to analyse the terms upon which the parties agreed that the guarantee would be provided and the circumstances in which it might be called upon by the defendant.
[1](1979) 141 CLR 443.
Having reviewed the terms of the agreement I am of the opinion that there is a serious question to be tried as to whether the Access and Occupations Agreement limited the defendant's right to call upon this security in the absence of the resolution of any dispute. The terms of clause 8.2(a) seem to suggest that such a limitation was intended by the parties because it introduces, as the outer limit of the duration of the security, "the resolution of all outstanding issues between the parties under this agreement".
When first seeking payment of an invoice in February, the defendant did so on the basis that the plaintiff had caused loss by a “Track Occupation Overrun” which had disrupted its freight rail services. That basis for the claim has since been abandoned. It now appears that the defendant’s claim is based upon a right of indemnity under clause 9.1. The claim as now formulated is more fully set out in a letter dated 20 July 2009 from the defendant's solicitors to the plaintiff's solicitors.
There is a serious question to be tried as to whether there is a proper basis upon which the defendant may call upon the guarantee under clause 9.1, in the event of “Train Delay Costs” as defined in the agreement. Clause 9.1 seems to limit the right of indemnity by excepting from it “any breach, act or omission which solely causes a delay or disruption to a Rail Service”. That exception would seem to apply to the defendant’s rail service. Moreover, “Train Delay Costs” are defined to mean loss suffered by the defendant as a direct result of a delay or disruption to a freight rail service caused by the joint venture (including the plaintiff) other than a Track Occupation, but including a Track Occupation Overrun. The plaintiff contends that there was no Track Occupation Overrun because occupation rights had been granted by V/Line. The role of V/Line in granting the occupation rights and causing the delays to the defendant’s rail service exposes the third serious question to be tried. Does the defendant have any capacity to make the demand on the guarantee?
This question is, in my view, perhaps the most significant in the context of the challenges the plaintiff makes to the contractual right to demand payment and its claim for relief. That question arises out of an assignment of rights by the defendant under the Asset Surrender and Sale Agreement dated 13 April 2007. Under that agreement V/Line took over the below rail network and became the access provider to the corridor.
The plaintiff submits that it is clear from the terms of the assignment and in particular, clauses 15.2 and 15.3, that any right to call upon the guarantee that the defendant may have had under the Access and Occupations Agreement was assigned to and may now only be exercised by V/Line. There is substance in that submission, although it is unnecessary to resolve the issue at the time.
After the malfunction in the tricolour LED signal was detected, apparently at some time after the assignment, the joint venture was required to undertake rectification work. The work was done between 25 February and 2 March 2008. V/Line granted the joint venture “Track Occupation” rights for that purpose. After the defect was identified V/Line directed that only freight trains equipped with a Train Protection Warning System could operate on the line during hours that passenger trains were operating. The defendant’s trains were apparently not equipped with such a system. Thus, any disruption to services suffered by the defendant was directly attributable to a direction by V/Line and the lack of equipment on the defendant’s trains.
If the defendant had no capacity to make the demand at all, it seems unnecessary to consider whether the implication of a negative stipulation is necessary or whether some other accepted ground, such as absence of bona fides, is available to support the injunction. The defendant’s conduct appears high-handed and the construction of the Access and Occupation Agreement raises a serious question about its capacity to make the demand as well as its underlying claim.
In Bradto Pty Ltd v State of Victoria[2] the Court of Appeal expressed its view as to the approach to be taken on an application for interlocutory injunction.
[2](2006) 15 VR 65.
33In our view, it is desirable that a single test be applied in all cases where an interlocutory injunction is sought. There is nothing in the body of authority to which we have referred, nor any consideration of principle, which requires a special test to be applied to one subcategory of such injunction applications, namely, those where mandatory relief is sought. On the contrary, as pointed out convincingly by Hoffmann J in Films Rover (at [26] above), the grant of a mandatory interlocutory injunction may be justified in a particular case notwithstanding that the court does not feel the requisite “high degree of assurance”.
34As Lord Woolf MR said in Broadmoor Special Health Authority v Robinson, ([2000] 1 WLR 1590 at 1598 [22]) adopting the words of Lord Cooke in TV3 Network Ltd v Eveready New Zealand Ltd ([1993] 3 NZLR 435 at 438):
[T]he remedy of injunction should be available whenever required by justice. (Cited by Gillard J in Hartleys Limited v Martin [2002] VSC 301 at [30].)
35In our view, the flexibility and adaptability of the remedy of injunction as an instrument of justice will be best served by the adoption of the Hoffmann approach. That is, whether the relief sought is prohibitory or mandatory, the court should take whichever course appears to carry the lower risk of injustice if it should turn out to have been “wrong”, in the sense of granting an injunction to a party who fails to establish his right at the trial, or in failing to grant an injunction to a party who succeeds at trial.
The balance of convenience, in my opinion, is perhaps the more significant issue in this application. Both the plaintiff and defendant are companies of substance. On one view this is a dispute over an amount of $216,685. Whether the amount is repaid to the bank or retained by the defendant may have little consequence upon the resources of the plaintiff and its ability to carry on its business. But the plaintiff does not put its case on that basis.
The plaintiff contends that merely by calling upon the guarantee the defendant has exposed the plaintiff to damage to its reputation in the industry, reflecting on its willingness to meet its contractual obligations, quite apart from any suggestion that it might be experiencing financial difficulties.
The damage to reputation, it is said, is one that might affect the plaintiff adversely when negotiating contracts for future business, because the events may cast some doubt upon its willingness or ability to perform and significantly, may give to its competitors an unfair advantage to use the occasion as an opportunity to differentiate themselves from the plaintiff.
The basis for the suggested damage, set out in the affidavit of Mr Spears, initially appeared to overstate the risk of reputational damage. My attention was, however, directed to Austrak Pty Ltd v John Holland,[3] a decision of Chesterman J in the Supreme Court of Queensland. I am persuaded, as was his Honour in that case, that notwithstanding my reservations, which might be expressed in like terms to those expressed by his Honour at paragraph 34, authority is firmly in favour of recognising the importance of the reputational damage that might be caused by conduct of the kind that occurred in this case.
[3][2006] QSC 103.
His Honour referred to the decision of Hunter J in Abigroup Contractors Pty Ltd v Peninsula Balmain Pty Ltd,[4] the decision of Rolf J in Barclay v Mowlem[5], a decision of Austin J in Reed Construction,[6] and the decision of Byrne J in this Court in Walter Construction Group Limited v Secretary Department of Infrastructure,[7] as giving considerable weight to the proposition that calling upon guarantees is very likely to cause significant reputational damage which is not capable of adequate compensation by an award of damages.
[4]Supreme Court of New South Wales, 2 December 1999.
[5](1991) 23 NSWLR 451.
[6](1999) 15 BCL 158.
[7][2000] VSC 232.
It might be said in the present case that, because the guarantee has been called and the money paid, the horse has bolted. Any reputational damage has been done, and that the injunctions sought will not remedy the plaintiff’s loss of reputation.
I am persuaded that is not the case. The restoration of the status quo, or a position near enough to the status quo, will restore the plaintiff to a position where a guarantee is reinstated and can be held by the defendant, subject to the supervision of the Court. This will go some way to contain the damage done to its reputation pending trial.
This is a case where justice requires orders of the kind sought by the plaintiff to restore the status quo. The prejudice or harm to the defendant is negligible in the sense that while the defendant is denied what it contends to be a guarantee equivalent to cash, it is not denied access to a guarantee to satisfy its legitimate claim, if it has one.
On the other hand, if the injunction is refused, the plaintiff is left in the position where it is exposed to reputational harm which seems to be accepted by the courts as a by-product of the events that have occurred and which, as has been recognised by the courts, cannot be adequately compensated by an award of damages.
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DATE: 22 July 2009
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