Ceresola TLS AG v Thiess Pty Ltd & John Holland Pty Ltd [2011] QSC 115

HIS HONOUR: On 3 April, 2009, the applicant and the respondents (trading as "Thiess John Holland") entered into a written agreement under which the applicant agreed to provide eight tunnel forming machines for use in a construction project known as the Airport Link Project. For convenience, I will refer simply to Thiess John Holland as the respondent.

Pursuant to that contract, in terms to which I shall refer in some further detail shortly, the applicant procured provision of a bank guarantee in favour of the respondent. The amount presently secured under that bank guarantee is some EUR 360,000.

The respondent has contended that it is entitled to liquidated damages from the applicant as a consequence of late delivery of the machinery under the agreement. The applicant contests that the respondent has any such entitlement to claim liquidated damages.

The respondent, however, has indicated its intention to call on the bank guarantee and obtain payment of the approximately EUR 360,000 thereunder, which it will apply to its claimed liquidated damages.

The applicant now applies for an interim injunction to restrain the respondent from calling on that bank guarantee.

The applicant seeks this injunction presently only on an interim basis for a couple of weeks to enable material to be put together for the purposes of a full interlocutory hearing in respect of ongoing injunctive relief pending the determination of the applicant's claim that the respondent is not entitled to the liquidated damages to which it has asserted a right.

The applicant has pointed to a number of issues which it says give rise to good arguments as to why the respondent is not entitled to the liquidated damages that it claims. It points, for example, to clause 15.4 of the agreement, and contends that the pre-conditions for the respondent to claim liquidated damages in accordance with that clause have not been met.

A further argument mounted by the applicant is, in effect, in reliance on the maxim "ex turpi causa non oritur actio", by which the applicant contends that if there was any delay in the delivery of this machinery under the agreement, such delay was caused by fault or default on the part of the respondent, and that in those circumstances the respondent cannot have the benefit of a contractual provision which confers on it a pecuniary benefit arising from its own default.

The applicant also argues that the calculation of the amount of liquidated damages is incorrect and not in accordance with the relevant contractual provisions. In particular, it points to the calculation of liquidated damages in respect of a number of items where the respondent has apparently taken variations into account, but, so the applicant says, contractual variations are not to be reckoned as part of the calculation.

Further arguments advanced by the applicant go to the construction of particular clauses of the agreement, and amount to contentions that the claim for liquidated damages is not available on a proper interpretation of the contract between the parties.

I am prepared to accept for today's purposes that the matters pointed to by the applicant are, if I may adopt somewhat old fashioned language in this regard, triable issues or serious questions to be tried with respect to the entitlement of the respondent to claim liquidated damages for late delivery, and with respect to the proper calculation of any such liquidated damages.

The matter, however, does not rest there. This is not an application to restrain the respondent from making a claim for liquidated damages, if such a claim were able to be maintained. This is an application to restrain the respondent from calling on the unconditional bank guarantee that was given as part of, and pursuant to, the contractual arrangements entered into between the parties.

In that regard, the applicant's contention, and indeed the applicant's only contention, is founded on clause 19.5 of the contract, to which I will refer in some detail shortly.

The applicant's submission is that under clause 19.5 of the contract the respondent's entitlement to make claim on the security or bank guarantee is contingent on a number of matters, the first of which being that there be monies due to the applicant, which must then be utilised by way of deduction and monies in priority to any call on the bank guarantee. It was submitted that the call on the bank guarantee can and must be made only after it is established that there are insufficient monies to meet the claim, and then recourse can be had to the bank guarantee for payment of any balance due.

The submission was that clause 19.5 is the only operative clause in the contract by which effect or purpose is given to the bank guarantee and that in the present case there is at least a real issue as to whether the respondent has an entitlement to make a claim on the bank guarantee, in accordance with the provisions of clause 19.5.

The applicant says that, in view of that issue, the balance of convenience favours the grant of an injunction on an interim basis. It can be shortly stated that the applicant points to public commercial embarrassment and possible detriment which it might suffer if the bank guarantee is called on and it becomes public knowledge that the bank guarantee has been called on, as opposed to there being no prejudice that can be suffered by the respondent if the injunction issues on an interim basis and the status quo is preserved for a couple of weeks.

Counsel for the respondent, however, pointed to the unconditional nature of the bank guarantee that has been given and submitted that there is no such contractual restriction as was contended for by the applicant such as gives rise to any entitlement on the part of the applicant to seek injunctive relief, whether on an interim or an interlocutory basis.

In order to understand the arguments advanced, it will be necessary to refer to the relevant terms of the contract. The starting point for present purposes is clause 23 of the general conditions of the contract. Clause 23 provided:

23.1 The Supplier shall provide within 14 days of the date of the execution of this Agreement, Performance Security to TJH.

23.2 Failure to provide Performance Security strictly in accordance with Clause 23.1 shall be a substantial breach of this Agreement within the meaning of Clauses 28.8 and 28.9.

23.3 Upon issue of a notice referred to in Clause 18.1, TJH's entitlement to Performance Security shall be reduced to the percentage thereof stated in Schedule 2 or, if no percentage is stated, by one-half.

23.4 TJH shall release to the Supplier any remaining Performance Security held in accordance with Clause 21.5.

"Performance security" was defined in clause 1.1 and Schedule 1 of the General Conditions of Agreement to mean: "1 or more banker's undertakings from an Australian bank in the form set out in Annexure "A", or other unconditional securities acceptable to TJH and capable of being converted into money through a bank in Brisbane, to secure the Supplier's due and property performance of this Agreement (including any obligation under clause 24) in the amount(s) set out in Schedule 2.

The contractual obligations relating to delivery appear in clause 15. Clause 15.1 required that "[n]ot earlier than the Earliest Date for Acceptance or later than the Date for Delivery, the Supplier shall deliver the Plant to the Place for Delivery."

I pause to note that one of the issues between the parties is whether a date for delivery or dates for delivery was nominated under the contract or subsequently reached as between the parties. As with the other issues to which I referred earlier, I am prepared to accept for today's purposes that there are serious questions to be investigated in that regard but, again, the fact that those serious questions exist is not determinative for present purposes.

In any event, clause 15.4 provides, in effect, that if the applicant failed to deliver the plant to the requisite place by the due date for delivery, then the applicant was required to pay the respondent "by way of liquidated damages the amount per day stated in Schedule 2 for every day after but not including the Date of Delivery up to and including the Date of Delivery or the date that this Agreement is terminated, whichever occurs first". That is the provision pursuant to which the respondent has made claim against the applicant for some €423,000 by way of liquidated damages.

Clause 19 of the agreement covers the contractual provisions relating to payment claims, payment certificates and time for payment and is in the following terms:

Payment Claims, Payment Certificates and Time for Payment

19.1 Upon the achievement of a Milestone, the Supplier may deliver to TJH a claim for payment in respect of the achievement of that Milestone, any variations implemented in accordance with Clause 14 and any other amounts due to the Supplier by TJH under this Agreement, together with evidence in support of the total amount claimed for payment by the Supplier and such other information as TJH may reasonably require.

19.2 Subject to Clause 19.3, TJH shall within the period stated in Schedule 2, or if no period is stated in Schedule 2 then within 28 days after receipt by TJH of the Supplier's claim for payment, pay to the Supplier the amount it determines to be due to the Supplier in respect of the claim for payment.

19.3 If property in or title to the Plant will not pass to TJH immediately upon the payment of an amount to the Supplier under Clause 192, it is a condition precedent to the Supplier becoming entitled under Clause 192 to such payment that the Supplier has first provided to TJH an Advance Payment Security for an amount equal to the amount claimed by the Supplier in its claim for payment.

19.4 Payment of moneys shall not be evidence of the value or suitability of the Plant or an admission of liability but shall be a payment on account only.

19.5 TJH may deduct from moneys otherwise due to the Supplier any moneys due from the Supplier to TJH and if those moneys are insufficient, TJH may have recourse to any Performance Security or Advance Payment Security held by TJH to obtain moneys due form the Supplier to TJH.

It is this last clause, 19.5, on which the applicant places particular reliance for today's purposes. The applicant contends that this is the only clause in the agreement in which specific provision is made for the respondent to have contractual recourse to the performance security.

In the course of argument, counsel referred me to a number of other provisions of the agreement and the schedules and the annexures to the agreement, particularly with respect to the disputes between the parties concerning the existence or non-existence of dates for delivery. In view of my acceptance for today's purposes of a genuine dispute on those issues between the parties, it is unnecessary for me to recite those terms at length. I should, however, record that the contract sets out in annexure A the form of unconditional banker's undertaking referred to in the definition of "performance security" in clause 1.1.

The form of unconditional banker's undertaking provided for in annexure A was as follows:

"In consideration of Thiess Pty Ltd and John Holland Pty Ltd trading as Thiess John Holland ABN 17 438 477 668 of 1 Gympie Road, Kedron, Queensland, 4101 accepting this undertaking in satisfaction of the Thiess John Holland's requirement for [INSERT] ("Supplier") to provide Thiess John Holland with security for performance in relation to Agreement [insert contract details] ("Agreement") the [INSERT] bank of [INSERT] ("Bank") undertakes irrevocably and unconditionally to pay to Thiess John Holland on demand in writing any sum or sums which may from time to time be demanded by Thiess John Holland to an amount now exceeding [INSERT] ($[INSERT]) (sum) in the aggregate.

Such payment or payments will be made by the Bank to Thiess John Holland without reference by the Bank to the Supplier and notwithstanding any notice to the Bank by the Supplier not to pay to Thiess John Holland any moneys hereunder and irrespective of the performance or non-performance by the Supplier of the terms of the Agreement.

The Banks' liability hereunder will not be impaired or discharged by any alterations which may be made in the terms of the Agreement or by any extension of time or other forbearance on this part of either Thiess John Holland or the Supplier to the other.

This undertaking will continue in force either until notification in writing has been received by the Bank from Thiess John Holland that this undertaking is no longer required or until payment to Thiess John Holland by the Bank of the whole of the sum or the balance thereof remaining after any part payment or payments or until this Guarantee is returned to the Bank.

Notwithstanding anything contained herein the Bank reserves the right to terminate this undertaking at any time upon payment to Thiess John Holland of the sum or the balance thereof remaining after any part payment or payments or such lesser amount as Thiess John Holland may require.

On expiry or when no longer required please return this document for cancellation to the Manager". (emphasis added)

For reasons that I will elaborate on shortly, counsel for the respondents emphasised the passage in the form of undertaking that I have highlighted, noting that the parties agreed that the form of undertaking to be given by the bank was unconditional in terms and, in particular, required the bank to make payment "irrespective of the performance or non-performance by the supplier of the terms of the agreement".

The preliminary question raised by the respondent is to the effect that the applicant is simply not entitled to seek an injunction to restrain the respondent from calling on that unconditional bank guarantee.

The principles governing the construction and application of bank guarantees have been considered in a number of cases of high authority over the last 30 years or so, commencing with what has been described as the seminal judgment of the High Court in Wood Hall Limited v. Pipeline Authority [1979] HCA 21; (1979) 141 CLR 443.

In the relatively recent judgment of the Full Federal Court in Clough Engineering Limited v. Oil and Natural Gas Corporation Limited (2008) 249 ALR 458, French, Jacobson and Graham JJ in a joint judgment set out a convenient summary of the constructional principles relating to the performance of bank guarantees. In the course of that judgment, their Honours drew particularly on the judgment of the Victorian Court of Appeal in Fletcher Construction Australia Limited v. Varnsdorf Pty Ltd [1998] 3 VR 812.

On the basis of those authorities, it is sufficient for present purposes to note that the general rule is that a Court will not enjoin the issuer of a performance guarantee from performing its unconditional obligation to make payment. A number of exceptions to that general rule have been identified. They are identified in Clough Engineering at [77] as:

(1) An injunction will issue to prevent a party in whose favour the performance guarantee has been given from acting fraudulently.

(2) An injunction will issue to prevent a party in whose favour the performance guarantee has been given from acting unconscionably in contravention of the Trade Practices Act 1974 (Cth).

(3) While the Court will not restrain the issuer of a performance guarantee from acting on an unqualified promise to pay if the party in whose favour the guarantee 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. Their Honours drew in that regard from the judgment of Austin J in Reed Construction Services v Kheng Seng (Australia) Pty Ltd (1999) 15 BCL 158 at 164.

Their Honours in the Full Federal Court said in relation to that last mentioned principle that: "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".

Their Honours in Clough Engineering went further to refer to the judgment of the Full Court in Victoria in the Fletcher Construction case, noting particularly the purposes identified in the Fletcher Construction case for which a beneficiary of a bank guarantee may have stipulated for same in a contract.

In the Fletcher Construction case, Callaway JA identified those reason in brief at 826: "One is to provide security. If [the beneficiary] 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 the 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".

The exercise then becomes one of looking at the contract in question to determine whether the provision of the bank guarantee was one merely for provision of security or was an exercise as between the parties in risk allocation pending resolution of the dispute.

The Full Federal Court in Clough Engineering noted the importance of examining a contract carefully for the purposes of undertaking such an exercise. At [80] their Honours said,(citing Fletcher Construction at 827): "Thus, subject to the exceptions of fraud and unconscionability, the beneficiary of a performance guarantee granted in its favour as a risk allocation device, will be entitled to call upon the guarantee even if it turns out, ultimately, that the other party was not in default".

Their Honours followed that statement of principle immediately with an observation that: "in determining whether the underlying contract confers an unfettered right to call upon the performance guarantee, the performance of such instruments in the construction industry, both nationally and internationally, is a factor which bears upon the question of construction of the contract".

Their Honours went on, however, to note that whilst the commercial background informs the construction of a contract, 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.

Their Honours said at [83]: "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, that is, non-fraudulently".

Their Honours said further at [85] that: "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". They said that: "This accords with the basic principle of construction that the terms of an instrument must be read as a whole".

Turning then to the contract with which we are concerned in the present case, the immediate question is whether the provision of the bank guarantee was an exercise in allocating risk. It also involves a consideration as to whether, as is contended by the applicant, the only work to be done by the undertaking is pursuant to clause 19.5.

I have already referred to clause 23.1 which is an express requirement on the part of the applicant to provide the performance security. The requirement for it to provide the security was not hedged about in any way. It was an absolute condition and, indeed, by clause 23.2, was made a fundamental condition of the contract between the parties.

There was also no issue about the form of the bank guarantee which was to be provided. It was agreed by the parties expressly to be one which was unconditional in terms and, again, not hedged about in any way by conditions or pre-conditions. The terms of the unconditional banker's undertaking contained in annexure A have been set out above and really speak for themselves.

I do not accept the applicant's submission that the only work to be done by the performance guarantee under the contact is that provided for by clause 19.5. Clause 19.5 represents a particular circumstance within which the parties have agreed that recourse might be had by the respondent to the bank guarantee but it is by no means the only circumstance within which the bank guarantee has efficacy under the terms of the agreement.

The performance security which the applicant was required to put up by the terms of clause 23 of the agreement was one which, according to the definition of "performance security", was "to secure [the applicant's] due and proper performance of this Agreement". That had application across the agreement generally and, indeed, the definition of performance security gives a further example of the application or availability of the performance guarantee, namely, by way of securing obligations under clause 24 of the agreement.

Clause 24 of the agreement, the terms of which I will not set out in full here, effectively contained a put option by which the respondent could compel the applicant to buy back the plant on specified terms and conditions and it specified prices nominated. The performance security was expressly contemplated to extend to securing the performance by the applicant of its obligations under that buy-back scenario.

Moreover, the entitlement of the respondent to make claim for liquidated damages under clause 15 is not linked to or necessarily interconnected with the payment regime and setoff regime set out under clause 19 of the agreement. The respondent's claim for liquidated damages is, in effect, freestanding and is able to be pursued by it as such.

It seems to me, therefore, that it cannot be said that the only work available to be performed by the bank undertaking is for the purposes of acting, in effect, as backup security for moneys which may be claimed under setoff by the respondent pursuant to clause 19.5.

Having reviewed the contract, it seems to be much more likely that the provision of the performance security constituted an exercise in risk allocation under the terms of the contract and, in particular, I am fortified in that view by having regard to the unconditional nature of the bank undertaking in the unconditional form agreed to by the parties as set out in annexure A.

There is, so far as I can see, no allegation that the respondent proposes to make its claim on the bank guarantee in circumstances infected by either fraud or unconscionability.

I should make one concluding observation and that is this: I have already referred to the observation by the Full Court in Clough Engineering that clear words will be required to support a construction which inhibits the respondent in this case from calling on the performance security. For the reasons that I have given, it seems to me that clause 19.5 does not have the general application which is contended for by the applicant and, in any case, does not constitute clear words which would inhibit the respondent from making claim on the unconditional bank guarantee.

In the absence of any operative fraud or unconscionability, therefore, it seems to me that there is no reason on a proper construction of the contract why the respondent ought be deprived of the opportunity to call on the unconditional bank guarantee of which it has the benefit.

In view of those findings, therefore, there is no proper basis for the grant of the injunction, even on an interim basis, and the application is therefore dismissed.

HIS HONOUR: The applicant will pay the respondent's costs of and incidental to the application.