McVeigh v Chief Executive of the Department of Corrections
[2020] NZHC 1018
•15 May 2020
NOTE: CONFIDENTIALITY ORDERED IN TERMS OF PARAGRAPH [66] OF THIS JUDGMENT. IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE
CIV-2020-485-169
[2020] NZHC 1018
UNDER the Contract and Commercial Law Act 2017 IN THE MATTER OF
the liquidation of Decmil Construction NZ Limited (in liquidation)
BETWEEN
DERMOTT JOSEPH MCVEIGH
First Applicant/First Plaintiff
DECMIL CONSTRUCTION NZ LIMITED (IN LIQUIDATION)
Second Applicant/Second Plaintiff
DECMIL GROUP LIMITED
Third Applicant/Third PlaintiffAND
HER MAJESTY THE QUEEN IN RIGHT OF NEW ZEALAND ACTING BY AND
THROUGH THE CHIEF EXECUTIVE OF THE DEPARTMENT OF CORRECTIONS
First Respondent/First DefendantSWISS RE INTERNATIONAL SE
Second Respondent/Second Defendant
Hearing: 11 May 2020 Counsel:
M Tingey and L M Van for First and Second Applicants J E M Lethbridge for Third Applicant
C Meechan QC (by VMR) and S Bisley for First Respondent C Ensor and M Whitbread (by VMR) for Second Respondent (abiding)
Judgment:
15 May 2020
MCVEIGH v CHIEF EXECUTIVE OF THE DEPARTMENT OF CORRECTIONS [2020] NZHC 1018 [15 May 2020]
JUDGMENT OF ELLIS J
[1] The applicants seek an interlocutory injunction prohibiting Swiss Re International SE (Swiss Re) from responding to a demand by the Chief Executive of the Department of Corrections (Corrections) for payment on Bonds entered into as surety for a Contract between Corrections and Decmil Construction NZ Limited (in Liquidation) (Decmil NZ). A “holding” interim injunction was made by me on 24 April 2020, pending a defended hearing of the application. That hearing took place on Monday this week.
FACTUAL OVERVIEW
[2] Between 2013 and 2018 New Zealand saw a rapid growth in its prison population.1 Existing prisons could not accommodate the rise in the prison muster. The need for more capacity led Corrections to develop a programme aimed at procuring the rapid build and deployment of more prisoner accommodation. The Contract between Corrections and Decmil NZ related to the construction of these “rapid deployment” prisons across various sites in New Zealand. The Contract was entered into on 17 October 2017 but has subsequently been varied by way of two deeds of variation, dated 28 May 2018 and 12 June 2018. The original contract and these two documents together constitute the relevant Contract here.
[3] To secure performance of Decmil NZ’s performance under the Contract, Contractor’s Bonds were provided by ANZ Bank New Zealand Limited (ANZ) and Swiss Re respectively. Bonds were also provided in lieu of retentions. The total value of the ANZ and Swiss Re Bonds was in excess of $12 million.
[4] The Bonds were secured by way of a parent company guarantee, given by Decmil Group Limited (Decmil Group), an ASX listed company.
1 Between the beginning of 2013 and March 2018 there was a 28 per cent increase in the prison muster.
[5] The Contract was terminated in February 2020.2 Underlying disputes over events leading up to and giving rise to the termination have been referred to arbitration, although, as I understand it, that process has yet to commence.
[6] On 11 March 2020, Corrections asked the Engineer to the Contract to make a provisional assessment of all amounts that may become owing to it by Decmil NZ as a result of Decmil NZ being removed.3 Once complete and certificated, that assessment would enable Corrections to call on the Bonds.4
[7] On 15 April 2020, Decmil NZ went into liquidation. The first applicant, Mr Dermott McVeigh, was appointed as the liquidator by Decmil NZ’s shareholder, Decmil Australia Pty Limited (Decmil Australia).
[8] Two days later, and relying on the liquidation as an “Insolvency Event”, Corrections called on the full amount of the Bonds from ANZ and Swiss Re.
[9] Decmil Group immediately wrote to ANZ and Swiss Re challenging the validity of the call. ANZ and Swiss Re subsequently responded that they proposed to pay on the Bonds in accordance with their terms, namely within five working days. Decmil NZ asked Corrections to confirm that it would withdraw the call but Corrections refused to do so.
[10] The application for an injunction was (I think) filed on 23 April 2020. But by the time the matter came before me the following day, ANZ had already made payment under its Bonds. So the “holding” interim injunction granted by me on 24 April related only to the Swiss Re Bonds. The issue now is whether that interlocutory injunction should continue.
2 Both Corrections and Decmil NZ claim to have terminated the Contract, on different dates in February. It is agreed, however, that one way or another it is at an end.
3 Under cl 14.2.7 of the Contract.
4 Under cl 3.1.6 of the Contract. The Engineer has filed an affidavit in these proceedings deposing that while it will yet take him a considerable time to complete this provisional assessment, his present view is that the amount owing is likely to be in excess of the combined value of the ANZ and Swiss Re Bonds. This “interim” provisional assessment, and the appropriateness of making it, is contested by the applicants.
THE CONTRACTUAL MATRIX
[11] Before turning to consider the merits of the application, it is necessary to say a little more about the nature of the various contractual obligations between the parties.
The Contract
[12] The Contract comprises a mixture of standard and special conditions. In general terms:
(a)The project involved the design and construction of five prison sites
using modular buildings fabricated in China;
(b)Decmil NZ was required to complete the design and construction work as specified by the Contract;
(c)Decmil NZ would provide Contractor’s Bonds in respect of certain Contract Works; and
(d)Decmil NZ could choose to provide Retention Bonds in lieu of Retentions.
Contractor’s Bonds
[13] Contractor’s Bonds are dealt with in cl 3 and its subclauses. The Contractor’s Bonds are all separately defined by reference to the Separable Portions of the Contract Works to which they relate. They are referred to as the Rolleston Bond, Tongariro Bond, Christchurch Women’s Bond, Christchurch Men’s Bond and the Rimutaka Bond.
[14]Clause 3.1.2 provided that the Contractor’s Bonds would be:5
(a)for the amount stated in the Special Conditions of Contract;
(b)in the form set out in Schedule 3; and
5 Amended clause 3.1.2, Special Conditions.
(c)issued by a registered bank or insurer approved by Corrections.
[15]Under cl 3.1.6:
(a)demand could be made by Corrections against the issuers of the Contractor’s Bonds to convert them to cash where:
(i)Corrections considers Decmil NZ was in breach of the Contract and a certificate from the Engineer has been obtained as required by the Contractor’s Bond; or
(ii)An “Insolvency Event” occurs.
(b)the cash proceeds of the Contractor’s Bonds can only be applied to:
(i)the cost of remedying the performance breach or costs arising from the Insolvency Event; or
(ii)compensation for damages consequent on the Performance
breach or Insolvency Event.
[16]An Insolvency Event is defined as occurring when a relevant person:
(a)becomes bankrupt;
(b)goes into liquidation;
(c)has a receiver, administrator or statutory manager appointed;
(d)is insolvent or unable to pay its indebtedness as it falls due;
(e)stops or suspends, or threatens to stop or suspend, payment of any of its indebtedness, or begins negotiations or takes any proceedings to reschedule any of its indebtedness;
(f)makes, or proposes to make, an assignment, arrangement, or composition with, or for the benefit of, its creditors in respect of or affecting any of its indebtedness; or
(g)something having a substantially similar effect to (a) to (f) happens in connection with that Person under the law of any jurisdiction.
[17] Clause 3.1.7 stipulates that Decmil NZ is not entitled to interest on the cash proceeds of a Contractor’s Bond if Corrections has cashed the Bond in circumstances where Corrections was entitled to do so.
[18] Clause 3.1.8 stipulates that if it is determined that Corrections was not entitled to call on the Contractor’s Bond in accordance with the Contract, then Corrections is to pay interest on the amount converted at a rate of 4 per cent over the 90-day bank bill rate from the date of conversion until the first to occur of:
(a)the date of repayment; or
(b)the date that Decmil NZ defaults in the performance of the Contract or an Insolvency Event occurs in respect of Decmil NZ.
[19]Clause 3.1.8 also states that Decmil NZ agrees that:
… this clause 3.1.8 is the Contractor’s sole remedy and the Contractor has no Claim (or waives any Claim it has) as a consequence of the conversion of the Contractor’s Bond into money.
[20] Clause 3.1.9A requires Corrections to use reasonable endeavours to return the balance of any cash proceeds of a Contractor’s Bond call to which it is not entitled to Decmil NZ within 10 working days of the date of a practical completion certificate in respect of the relevant separable portion.
Retention Bonds
[21] Clause 12.3.3 allowed Decmil NZ to obtain Retention Bonds, for the benefit of Corrections. There is no equivalent in the Contract to cl 3.1.6 governing how Retention Bonds may be applied once called upon.
Termination
[22] Clause 14.1.2(e) provided that, in the event that Decmil NZ failed to proceed regularly and diligently with the Contract Works, Corrections could either terminate the Contract or resume possession. Consequential matters are dealt with in cl 14.2. Of particular note:
(a)Clause 14.2.2 provides that:
… in the event of an Insolvency Event occurring in relation to the Contractor or the Guarantor (which for the avoidance of doubt are default events under the Contract), the Principal may at its option by notice in writing to the Contractor either terminate the Contract or resume possession of the Site.
(b)Clause 14.2.7 provides that where Corrections resumes possession of the Site or terminates the Contract under 14.2.1 or 14.2.2, it may call on the Contractor’s Bonds, the Retention Bonds or any parent company. That call must be made in respect of the amount provisionally assessed by the Engineer as the sum of all amounts that may become owing to Corrections because of Decmil NZ being removed (which will primarily be the cost that the Corrections will incur in completing the Contract Works).
Relationship between the parties
[23]Clause 6 provides that:
(a)The Contract Works will be delivered by the Contractor in the spirit of collaboration. The Contractor recognises that the objective of the Principal is to deliver the Project with optimum results for the Principal being measured by reference to safety, performance, overall cost, timeframe and quality.
(b)The Contractor and Principal will be open and honest at all times and will give and welcome feedback. Any difficulties will be highlighted as soon as possible and information relating to the Contract Works or the Project shared. Confrontational attitudes are strongly discouraged and the parties shall ensure that their employees will adopt such nonconfrontational attitudes.
(c)The Contractor and Principal will work in a spirit of trust and co- operation towards the creation of an open, ethical and progressive relationship with a view to maximising the potential for achieving the
Principal’s Requirements. Teamwork is encouraged. The Contractor and Principal will support collaborative behaviour, confront inappropriate behaviour and will seek to jointly identify and discuss problems with each other and the Engineer.
(d)The Principal will use reasonable endeavours to ensure that Separate Contractors, consultants it engages, and the Engineer will behave in a fair and reasonable manner and in a way that is, to the maximum extent possible, aimed at achieving a successful Project outcome which is for the mutual benefit of all parties.
(e)The Contractor will use reasonable endeavours to ensure that its Subcontractors and consultants behave in a fair and reasonable manner and in a way that is, to the maximum extent possible, aimed at achieving a successful Project outcome which is for the mutual benefit of all parties.
(f)The provisions of clause 6 shall be the key principles pursuant to which the Contractor undertakes the Contract Works and all decisions and actions made by the Contractor, the Engineer and Principal shall be made having regard to the provisions of clause 6. However, notwithstanding the provisions of clause 6, the Contractor and Principal recognise that there is not a mutual sharing of obligations, rights and responsibilities between the Contractor, the Principal and the Engineer and the specific obligations, rights and responsibilities of the Contractor, the Principal and the Engineer are as set out in the provisions of the Contract, other than clause 6.
[24] That said, however, cl 20.1 makes it clear that the project is not a joint venture and, more relevantly, states:
The Contractor acknowledges that there is no implied duty of good faith on the Principal towards the Contractor.
The parent company guarantee
[25] On 24 November 2017, in accordance with the Contract, Decmil Group provided a Parent Company Guarantee to Corrections, guaranteeing the obligations of Decmil NZ to Corrections under the Contract.
The Bonds
[26] In December 2017 (Swiss Re) and August 2018 (ANZ) issued Contractor’s and Retention Bonds totalling $8,250,000 and $4,268,444.35 respectively. For the reasons given earlier, this judgment is concerned only with the Swiss Re Bonds, which comprise $1,200,000 in Retention Bonds and $3,068,444.35 in Contractor’s Bonds.
[27] Subject only to the point made at [21] above, it was not suggested to me that there was any material distinction between the Performance and Retention Bonds in terms of the matters presently at issue. But because the parties place some store in the precise wording of the Bonds it is useful to set out the key clauses verbatim. So, by way of example, a Swiss Re Contractor’s Bond of 14 December 2017 relevantly declares:
1.The Financial Institution [Swiss Re] irrevocably undertakes to the Principal [Corrections] to pay immediately on demand, (subject to compliance with clause 2 of this deed) and in any case within five (5) Working Days after the date of demand being made (time being of the essence), any sum or sums which may from time to time be demanded by the Principal for any amount certified as payable pursuant to clause 2 of this deed, up to a maximum aggregate sum of One Million, Nine Hundred and Seventy One Thousand and Twenty Eight New Zealand Dollars and Fifty New Zealand Cents (NZD 1,971,028.50) (the Guaranteed Amount) and is bound for payment of the Guaranteed Amount to the Principal.
2.Any demand by the Principal pursuant to clause 1 of this deed shall be in writing and shall, if the demand relates to default(s) under the Contract by the Contractor (other than an Insolvency Event), be accompanied by a certificate from the Engineer under the Contract (acting independently and impartially) advising of default(s) by the Contractor of its obligations under the Contract, the failure of the Contractor to remedy such default(s) within the period required under the Contract, and certifying an amount payable by the Contractor as a result of such default(s), which certificate, shall, for the purposes of this Bond, be conclusive evidence of such breach and the amount payable. The amount demanded shall be paid by the Financial Institution to a bank account in New Zealand advised by the Principal.
3.For the avoidance of doubt, if the demand by the Principal pursuant to clause 1 of this deed relates to the occurrence of an Insolvency Event (as defined in the Contract) in respect of the Contractor, the Principal is not required to provide the certificate described in clause 2 of this deed and shall be entitled to make demand, as if certified, for the whole of the Guaranteed Amount (or such lesser amount as the Principal may determine in its sole discretion).
4.The undertaking contained in this deed shall be a continuing undertaking and the liability of the Financial Institution under it shall not be affected by any act, omission, matter or thing that would otherwise operate in law or in equity to reduce or release the Financial Institution from liability under this deed. Without limitation to the foregoing, the Financial Institution shall remain liable under this deed notwithstanding:
(a)any invalidity, illegality or unenforceability of the Contract;
(b)any alteration, amendment or variation in the terms of the Contract or the scope, nature or extent of the Contract Works (as defined in the Contract) under the Contract;
(c)any allowance of time by any party under the Contract;
(d)any forbearance or waiver or other indulgence by the Principal in respect of any of the Contractor’s obligations, or in respect of any default by the Contractor, under the Contract;
(e)the occurrence of an Insolvency Event (as defined in the Contract) in respect of the Contractor; or
(f)any dispute or disagreement whatsoever between the Principal and the Contractor under or in relation to the Contract.
5.The undertakings contained in this deed shall terminate upon the earlier of the following events:
(a)upon payment by the Financial Institution of the Guaranteed Amount;
(b)such earlier date as may be agreed in writing by the Principal and the Financial Institution; or
(c)the return of this deed by the Principal to the Financial Institution, accompanied by a written release duly signed by the Principal confirming that the Principal no longer requires the undertaking contained in this deed; or
(d)the date of issue of the last of the Certificates of Practical Completion to be issued for Separable Portions 1 and 2 and the Financial Institution receiving written notification from the Principal.
…
Deed of indemnity
[28] The Swiss Re Bonds were issued by Swiss Re pursuant to the terms of Deed of Indemnity between Decmil Group and Westport Insurance Corporation (WIC) dated 27 March 2009 (the Westport Deed).6
[29]Under clause 2 of the Westport Deed, Decmil Group unconditionally and
irrevocably indemnified Swiss Re against all Loss and agreed to pay, immediately and
6 From 1 January 2010, all Bonds issued by WIC became underwritten by Swiss Re.
upon demand, to Swiss Re all payments made and liabilities incurred by Swiss Re under or in connection with a Bond.
THE INJUNCTION APPLICATION
The law
[30] There is no dispute as to the general principles governing applications for interim injunction. The applicant must first establish that there is a serious question to be tried. If that threshold is met, the court considers where the balance of convenience lies in terms of the impact on the parties of granting or refusing to grant the injunction sought. Lastly, and by way of cross-check, an assessment of the overall justice is required.
[31] But these general principles are qualified in a case where the injunction seeks to restrain payment under a Bond. That is because their purpose is to provide a security that is readily and promptly available, and assuredly realisable, when a specified triggering event occurs. In a construction context, Contractor’s Bonds are used to shift the financial risk of a dispute from the principal to the contractor, to the extent of the Bond. The courts are reluctant to enjoin a call on a Bond because to do so would undermine the commercial effectiveness of Bonds and inject legal and factual complexity into what should be a straightforward commercial undertaking. As the learned authors of Law of Guarantees state:7
It has been repeatedly stated that Contractor’s Bonds and irrevocable letters of credit are “the lifeblood of international commerce” and that consequently the court will not intervene and disturb the mercantile practice of treating the rights of the beneficiary as the equivalent of cash in hand.
[32] For these reasons, an applicant who seeks to injunct a call or payment on a Bond must meet a higher threshold than a “serious issue to be tried”.
[33] Traditionally, it has been the case that an applicant is required to show that the impugned call was fraudulent—more specifically that:8
7 Andrews & Millett, Law of Guarantees (7th ed, Sweet & Maxwell) at 16-027.
8 Alternative Power Solutions v Central Electricity Board [2014] UKPC 31, [2014] 4 All ER 882 at [55], citing United Trading Corporation SA v Allied Arab Bank Ltd [1985] 2 Lloyd’s Rep 554 at 561.
(a)the only realistic inference available on the facts was that the beneficiary could not honestly have believed in the validity of its call on the Bond; and
(b)the financial institution with which the Bond was held knew of that fact.
[34] It seems that in more recent times, however, this strict rule has been slightly relaxed—at least in the case of conditional (as opposed to on-demand) Bonds. So, in New Zealand:
(a)in Clark Road Developments v Rohits Civil & Infrastructure Ltd, Muir J recognised an exception where a plaintiff can positively establish that in its terms the relevant Bond does not respond to the call;9 and
(b)in Arrow International (NZ) Ltd v NZ Project 29 Ltd Cooke J recognised an exception where an applicant can demonstrate that the relevant contractual provisions are not being given effect: “which will principally depend on whether the conditions of the Contract and the Bond are being performed”.10
[35] In Simon Carves Ltd v Ensus UK Ltd, where an injunction was granted to restrain a call on a performance bond on the grounds of a breach of the terms of the underlying contract, the Judge summarised the principles extrapolated from the relevant authorities (including and in particular in the Court of Appeal’s decision in Sirius International Insurance Co v FAI General Insurance Ltd11) as follows:12
(a)Unless material fraud is established at a final trial or there is clear evidence of fraud at the without notice or interim injunction stage, the court will not act to prevent a bank from paying out on an on demand bond provided that the conditions of the bond itself have been complied with (such as formal notice in writing). However, fraud is
9 Clark Road Developments v Rohits Civil & Infrastructure Ltd [2017] NZHC 844 at [33].
10 Arrow International (NZ) Ltd v NZ Project 29 Ltd [2019] NZHC 1326 at [22].
11 Sirius International Insurance Co v FAI General Insurance Ltd [2003] 1 WLR 2214. In that case it was accepted by the England and Wales Court of Appeal that an injunction could be granted where it was “positively established” that the draw down on a letter of credit was contrary to an express condition contained in a separate contract (which in that case was not the contract the letter of credit was intended to support).
12 Simon Carves Ltd v Ensus UK Ltd [2011] EWHC 657 (TCC); [2011] B.L.R. 340 at [33].
not the only ground upon which a call on the bond can be restrained by injunction.
(b)The same applies in relation to a beneficiary seeking payment under the bond.
(c)There is no legal authority which permits the beneficiary to make a call on the bond when it is expressly disentitled from doing so.
(d)In principle, if the underlying contract, in relation to which the bond has been provided by way of security, clearly and expressly prevents the beneficiary party to the contract from making a demand on the bond, it can be restrained by the court from making a demand under the bond.
(e)The court when considering the case at a final trial will be able to determine finally what the underlying contract provides by way of restriction on the beneficiary party in calling on the bond. The position is necessarily different at the without notice or interim injunction stage because the court can only very rarely form a final view as to what the contract means. However given the importance of bonds and letters of credit in the commercial world, it would be necessary at this early stage for the court to be satisfied on the arguments and evidence put before it that the party seeking an injunction against the beneficiary had a strong case. It cannot be expected that the court at that stage will make what is in effect a final ruling.
[36] But the applicants here also rely on a line of cases in Singapore where the Courts have also recognised a further limited exception, where it can be shown that a call on a bond is “unconscionable”.
[37] The juridical basis for adopting unconscionability as a separate and independent ground for restraining a call on a performance bond is said to lie in the equitable nature of the injunction:13
Considerations of conscionability are applicable in relation to the use of injunctions in other areas of the law and there is no reason why these considerations should not be applied for the purposes of determining whether a call on a performance bond should be restrained so as to achieve a fair balance between the interests of the beneficiary and those of the obligor.
[38]As well:14
… a performance bond serves a different function from a letter of credit. The latter performs the role of payment by the obligor for goods shipped to it by
13 JBE Properties Pte Ltd v Gammon Pte Ltd [2011] 2 SLR 47 at [13].
14 At [10] (citations omitted).
the beneficiary (typically via sea or air from another country), and “has been the life blood of commerce in international trade for hundreds of years” … Interfering with payment under a letter of credit is tantamount to interfering with the primary obligation of the obligor to make payment under its contract with the beneficiary. Hence, payment under a letter of credit should not be disrupted or restrained by the court in the absence of fraud. In contrast, a performance bond is merely security for the secondary obligation of the obligor to pay damages if it breaches its primary contractual obligations to the beneficiary. A performance bond is not the lifeblood of commerce, whether generally or in the context of the construction industry specifically. Thus, a less stringent standard (as compared to the standard applicable vis-à-vis letters of credit) can justifiably be adopted for determining whether a call on a performance bond should be restrained. We should also add that where the wording of a performance bond is ambiguous, the court would be entitled to interpret the performance bond as being conditioned upon facts rather than upon documents or upon a mere demand …
[39] Importantly, however, even in these other cases where the fraud exception has been expanded, it does not suffice for an applicant to show that there is a serious issue to be tried (as to the responsiveness of the bond, the breach of the contractual provisions or the unconscionability of the call). As Ramsey J held in Permasteelisa Japan KK v Bouyguesstroi:15
In my judgment, whilst, as the Court of Appeal indicated in Sirius, a court might grant an injunction where there is an express term restricting the circumstances in which a party can draw on a letter of credit, and where it is positively established that the party was not entitled to draw down, the same will not apply where there is only a serious, arguable case to that effect. Otherwise the commercial effectiveness of letters of credit would be eroded.
[40]And as the Singaporean Court of Appeal has said:16
When determining if a strong prima facie case has been made out, the entire context of the case must be thoroughly considered, and it is only if the entire context of the case is particularly malodorous that such an injunction should be granted. We must emphasise that the courts’ discretion to grant such injunctions must be sparingly exercised and it should not be an easy thing for an applicant to establish a strong prima facie case.
The reason for setting the barrier at such a high level is that the equitable remedy of the interim prohibitive injunction is a very harsh one. It restricts the person in whose favour the performance bond was issued (“the beneficiary”) from doing that which he was entitled by agreement of the parties to do, and which he in all probability had bargained for during the negotiations leading up to the contract concerned. In essence, he would be prevented from enforcing a substantive right which he had contracted for.
15 Permasteelisa Japan KK v Bouyguesstroi [2007] EWHC 3508 (QB) at [51], cited in Clark Road Develpments at [34].
16 BS Mount Sofia Pte v Join-Aim Pte Ltd [2010] SGCA 28 at [21] to [25], citations omitted.
The availability of unconscionability, as a ground for relief for obligors of performance bonds from oppressive calls on the bonds by beneficiaries, does not necessarily make it any easier for such obligors to obtain such relief. This availability merely signifies the recognition that relief should be warranted in situations where the facts support a finding of unconscionability but not necessarily a finding of fraud. Unconscionability is a distinct and separate ground from fraud, and … includes conduct such as unfairness and abuse that are broader than the conduct that would constitute fraud. In other words, the availability of unconscionability acknowledges that conduct exhibited by the beneficiary other than fraud might be sufficiently reprehensible to justify relief on the part of the obligor. For example, unfairness is an element of unconscionability, but it would not make logical sense to say that a beneficiary had thereby acted in such an egregiously unfair manner as to amount to fraud. This is because the concept of unfairness admits of other dimensions beyond the fraudulent dimension, and is assessed on different parameters from those with which we assess fraud. The most we can say is that such conduct does not necessarily constitute fraud.
Hence, the availability of unconscionability as a ground for relief does not necessarily mean that it would be easier for an obligor of a performance bond to obtain injunctive relief from an oppressive call on the bond by a beneficiary. As mentioned earlier, the high threshold for unconscionability is established law and in this appeal we are merely reinforcing this and explaining why this is so. The reasons for requiring a high threshold for unconscionability relate to the need to strike the appropriate balance between the conflicting positions of the obligor and beneficiary of a performance bond, which we have termed the “perennial tension”. Tied up in this balance is the underlying need to preserve the raison d’être of performance bonds—that they are to provide security for the performance of the obligor’s obligations—which stems from broader policy reasons. If calls on this security by the beneficiary are too liberally subject to injunctive relief from the courts, this security loses its efficacy and the raison d’être of performance bonds would be eroded or even wholly undermined.
Furthermore, the courts should be slow to upset the status quo and disrupt the allocation of risk which the parties had decided upon for themselves in a building contract … . The bid price or other terms of the contract would in all probability have been influenced by the mode of provision of security, viz, a performance bond as opposed to a cash deposit. As with all contracts, the parties should abide by the bargain that they have struck.
Application to this case
[41]Fraud is not alleged here. Rather, the applicants’ position is that:
(a)Corrections was not entitled to make demand on the Bonds because:
(i)the Contract had been terminated before Decmil NZ was put into liquidation;
(ii)Corrections’ right to make demand on the Bonds in respect of an Insolvency Event under clause 3.1.6 of the Contract had not unconditionally accrued at the time of termination; and
(iii)the demands therefore seek to perform the Contract after its cancellation, contrary to s 42(1) of the Contract and Commercial Law Act 2017 (CCLA); or
(b)the call was unconscionable in light of:
(i)events leading up to the cancellation/termination of the Contract;
(ii)the fact that the triggering Insolvency Event was caused by the termination of the Contract;
(iii)the use of the Insolvency Event as a premise for calling upon the full amount of the Bonds rather than a (yet to be certified) amount assessed by the Engineer following alleged default under the Contract; and
(iv)other alleged post-termination breaches by Corrections of its obligations under cl 6 of the Contract.
Unconscionability
[42]I deal with the latter, unconscionability, argument first.
[43] The Singaporean cases do not sit easily with the relevant English (or New Zealand) authorities. I acknowledge, however, that the relatively extensive discussion of the unconscionability exception in the latest edition of Law of Guarantees might suggests that the question may be ripe for argument—albeit not, perhaps, ready
adoption.17 That this is unexplored territory, however, does not make it easy to conclude that the applicants’ position on the issue is strongly arguable.
[44] In any event, the unconscionability exception has hardly opened the floodgates, even in Singapore. Although the courts have been reluctant to say precisely what an applicant must establish (or show it has a strong chance of establishing) in order to get through the unconscionability door there can be no doubt that the threshold is a high one—as the synonyms used in the cases, such as “malodorous”, “abusive” or “reprehensible”, indicate.
[45] Here, I am unable to see that there is anything sufficiently unusual in the nature of the actions taken by Corrections (whether pre or post termination) that would arguably render the call unconscionable. There is nothing before me to suggest that Corrections has done other than stand on its contractual rights, as it believes them to be. Even if Corrections is proved wrongly to have done so (a question about which I cannot form even a tentative view and which will likely be determined through an arbitral process) that would not come close to the requisite unfairness or abuse.
[46] And notwithstanding Mr Tingey’s emphasis on the emphasis in cl 6 on collaboration, openness, honesty, trust and co-operation, those are slippery concepts in the context of a contract gone wrong. Moreover, the relationship between Corrections and Decmil NZ is expressly stated (in cl 20) not to be a fiduciary one.
[47] That leaves the contention that Corrections has taken unfair advantage of Decmil NZ’s post-termination liquidation to make a call on the Bonds for a greater amount than could have been demanded had the Engineer’s more time-consuming Certification process been completed. The Singaporean cases recognise that the courts might be justified in interfering in a demand/payment on the grounds of unconscionability where the claim is manifestly excessive (ie for a figure which is far more than the beneficiary’s actual loss could tum out to be, even if it succeeded in all its claims against the contractor).18
17 Above n 7, at 16-033-16-034.
18 See for example JBE Properties Ltd v Gammon Pte Ltd [2010] SGCA 46.
[48] The first difficulty with this is that—as noted at [43] above—it is far from clear to me that the New Zealand Courts would or should follow the Singaporean approach. Secondly, the proposition turns on the prior point that Correction were not entitled to make the call on the grounds of the Insolvency Event once the Contract was terminated. I address the contestability of that point further below. But the short point is that cl 3 of the Bond is clear in its terms that if such an Event occurs then the amount of any call is entirely a matter at the discretion of Corrections.
[49] And lastly, the Engineer has filed an affidavit in which he opines that the amount that will ultimately be found to be owing is likely to be in excess of the combined value of the ANZ and Swiss Re Bonds. While I accept that (like many other things) this is disputed, it means that the applicants are unable to persuade me that there is a strongly arguable case of unconscionability here.
Was Corrections precluded from making the demand by the termination of the Contract?
[50] This aspect of the present case involves a slight variant on the “condition precedent” cases referred to earlier. But I think the underlying principle is the same. As in those cases, the submission was that if the call on the Bond was not authorised by the Contract then the demand can be enjoined by the Court. Or put another way, the validity of the demand is “conditional” on it being authorised by the Contract. And here, Mr Tingey said, there was no such authorisation because the Contract had been terminated prior to the triggering Insolvency Event.
[51] To the extent the applicants’ position is, or needs to be, predicated on the Bonds themselves being “conditional” rather than “on demand” I am unable to conclude that this is strongly arguable.
[52] Clause 1 of the Bond set out above states that Swiss Re undertakes to “pay immediately on demand” any sum certified under cl 2. Clause 2 requires that where demand is triggered by the Contractor’s default the provision of an Engineer’s Certificate must be provided. Such a Certificate is stated to be “conclusive evidence” of both the triggering default and the amount payable. In the case of a demand
triggered by an Insolvency Event the certificate is effectively deemed to have been provided by cl 3 which makes it clear that no certificate is required.
[53] The most that can be said is that the obligation to pay on a “default” based demand is contingent on the provision of a certificate which is conclusive proof of its contents. Absent strong evidence of fraud, going behind the certificate would not (in my view) be permitted.19 Were that not so, the Bondsman would be placed in the impossible position or having to interrogate any demand made before making payment, notwithstanding that time is stated to be of the essence. That would undermine the purpose and commercial efficacy of a Bond arrangement.
[54] The point is even more clear cut where the trigger for the demand is an Insolvency Event. As just noted, it is difficult to see that, in those circumstances, the Bond requires anything more than a demand to trigger the obligation to pay. I do not accept (for example) that it is strongly arguable that on receipt of such a demand Swiss Re could be required to make some independent inquiry as to the occurrence of the relevant Event. While it might be a simple matter for the Financial Institution to check whether the Contractor had been placed into liquidation (as, indeed, Mr Ensor advised Swiss Re did here) if the Insolvency Event relied on was of some other, more contestable kind20 an obligation to make inquiries—let alone some form of determination—would place an impossible burden on the Financial Institution. Any suggestion that it was required to interrogate or second-guess the happening of the relevant Event, either factually or legally would be oppressive and quite contrary to the commercial purpose of the Bond.
[55] It is for essentially the same reason that Mr Tingey’s submission that payment should be enjoined because the underlying Contract had been cancelled is not strongly arguable. A Financial Institution faced with a demand for payment cannot sensibly be
19 In Arrow International (above n 9) the parties were in agreement that a Bond which appears to have been on very similar terms to the present was “conditional”. I am not so sure. In any event, because the parties were agreed, the issue was not canvassed in the judgment.
20 Such as those referred to in the fourth to sixth limbs of the definition at [16] above, namely that the Contract either is insolvent or unable to pay its indebtedness as it falls due or stops or suspends, or threatens to stop or suspend, payment of any of its indebtedness, or begins negotiations or takes any proceedings to reschedule any of its indebtedness or makes, or proposes to make, an assignment, arrangement, or composition with, or for the benefit of, its creditors in respect of or affecting any of its indebtedness.
expected to engage with and determine such a proposition, let alone its consequences. Even if put on notice as to a relevant dispute between the parties to the underlying Contract it cannot be right that the Financial Institution is required to form a view as to the merits of that dispute before making payment. That would be wholly inconsistent with the time for payment being of the essence and, again, the purpose of the Bonds.
[56] I acknowledge that, based on the cases already discussed, an injunction might issue where (as acknowledged in Sirius) it could be positively established (at the interlocutory stage) that the demand was precluded by a separate, relevant, legal obligation or right. But here, that is far from being so. Whether the termination of the Contract prior to the triggering Insolvency Event might affect the validity of the demand is, in my view, far from clear. Suffice it to note that:
(a)clause 3.1.8 of the Contract provides a specific remedy for a wrongful call on the Bonds and expressly states that this is the Contractor’s “sole remedy”;
(b)the Bonds themselves provide that Swiss Re’s liability to make payment is not affected by any act, omission, matter or thing that would otherwise reduce or release it from liability including, in particular:
(i)any invalidity, illegality or unenforceability of the Contract (cl 4(a)); or
(ii)any dispute or disagreement between Corrections and Decmil NZ under or in relation to the Contract (cl 4(f)).
[57] Nor is the position under s 42 of the CCLA any more obviously or arguably in the applicants’ favour. That section relevantly provides:
(1)When a contract is cancelled, the following provisions apply:
(a)to the extent that the contract remains unperformed at the time of the cancellation, no party is obliged or entitled to perform it further:
(b)to the extent that the contract has been performed at the time of the cancellation, no party is, by reason only of the cancellation, divested of any property transferred or money paid under the contract.
(2)This section is subject to the rest of this subpart.
…
[58] The proposition that s 42 might operate to preclude the demand in this case also faces significant hurdles, including that:
(a)If the Bonds are separate from the Contract and remain on foot as between Swiss Re and Corrections regardless of the status of the Contract (which they are and do21) it is difficult to see how calling on the Bonds constitutes Corrections seeking performance of any part of the Contract.
(b)Section 42 applies where a contract is cancelled and (Corrections says) the Contract was terminated by Corrections in accordance with clause 14.2.5 on 25 February 2020.
[59] For the reasons I have given I consider that any merit in the applicants’ arguments here is not nearly strong or obvious enough to meet the high threshold that undoubtedly still applies in cases where the Courts are asked to enjoin payment on a bond.
Balance of Convenience
[60] In light of that conclusion, it is strictly unnecessary to consider the balance of convenience. I therefore merely record my view that it, too, does not obviously or strongly favour the applicants. I simply record that:
(a)The question of balance of convenience generally only arises where there is doubt as to the adequacy of damages.22
21 The bases on which the Bonds might expire are expressly set out in cl 5 of the Bond and termination of the Contract is not one of them.
22 In American Cyanamid Co v Ethicon Ltd [1975] AC 396, [1975] 1 All ER 504 (HL) at 408-409 Lord Diplock observed that: “If damages in the measure recoverable at common law would be an
(b)By cl 3.1.8 of the Contract Decmil NZ has agreed that its sole remedy for a wrongful call is repayment of any wrongfully called amount, together with the prescribed amount of interest.
(c)Any losses suffered by Decmil NZ or Decmil Group, if payment in respect of the Demands is wrongly made, would be a matter as between them and Swiss Re. Swiss Re is a major bank and is plainly able to meet any such claims.
(d)If there was a claim against Corrections it, too, would be able to meet any damages awarded.
[61] In light of my substantive conclusion and the relative urgency of the matter I do not propose to canvass more specific issues of prejudice put forward on behalf of the Decmil Group (which is subject to the confidentiality order made below) and, in particular, the further material which was filed after the hearing.
Result
[62] The application that the interim injunction ordered by me on 24 April 2020 should continue is, accordingly, declined. The injunction is lifted.
[63] At Mr Tingey’s request, however, that order is not to take effect for three working days (namely not until 5 pm on Wednesday 20 May 2020) in order that the applicants may have time to consider their options and file an appeal if they wish.
Confidentiality
[64] As part of the interim orders made by me on 24 April I directed (by consent) that the all documents filed in this proceeding and orders made by the Court pursuant to the application be kept confidential by the parties and that the Court file not be searched without further order of the Court, made on notice to the applicants.
adequate remedy and the defendant would be in a financial position to pay them, no interlocutory injunction should normally be granted, however strong the plaintiff’s claim appeared to be at that stage.”
[65] At the substantive hearing that order was varied (again by consent) and now applies only to the material filed and submissions made addressing specific prejudice that the applicants have said they would suffer if the injunction was not continued.
[66] I have not referred to that material in this judgment and so (unless counsel promptly advise otherwise) there is no need for suppression orders in that regard. But the more limited order remains in place vis a vis any such material on the Court file and in terms of the submissions made at the hearing.
Rebecca Ellis J
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