Reasoning
35 The terms of the performance guarantees to be entered into under the Construction Contract are contained in Appendix III (not II) of Annexure A to the Contract. Clause 3.3.3 requires to be construed in the context of the document as a whole. This includes the context of Appendix III of Annexure A: see, for example, Re Media, Entertainment and Arts Alliance, Ex parte the Hoyts Corporation Pty Limited (1993) 178 CLR 379 at 386-387.
36 The performance guarantees prescribed by the Construction Contract accordingly promise payment even where disputes, which could include disputes as to whether or not Clough had failed to honour any of its commitments under the Construction Contract, are pending before a Court or arbitrator. This, in my opinion, is a powerful indicator that a mere claimed breach of contract, which is not fraudulently asserted is sufficient to trigger entitlement to call on the performance guarantee. Clough does not assert that ONGC has made a fraudulent claim. This construction is reinforced by the fact that, under the prescribed terms of the guarantees, the Banks are required to pay "without any demur, reservation, contest or protest and/or without any reference to the Contractor".
37 Under the terms of the performance guarantees, each of the Banks was entitled to treat the written demand by ONGC as conclusive and binding as to the amount due and payable, notwithstanding any dispute pending before any Court, Tribunal, Arbitrator or any other authority. Liability under the performance guarantees was absolute and unequivocal.
38 Accordingly, the demands in this case are equivalent to the certificate provided by the National Australia Bank (NAB) to HSBC, certifying in effect that the conditions of the letter of credit had been met: Ideas Plus Investments Ltd v National Australia Bank Ltd (2006) 32 WAR 467 at [14]. The Western Australian Court of Appeal held that the certificate "amounted to no more than an implied representation that it had reasonable grounds for issuing the certificate" at [51]. The reasonable grounds were the bona fide belief by NAB that the conditions were satisfied at [55]. The written demands are also analogous to the requisite statutory declaration in Fletcher Construction v Varnsdorf at p 830 to the effect that the amount claimed represented an amount(s) remaining unpaid to the owner. This was so even where the amount was disputed by the contractor.
39 If it were the case that, on its proper construction, ONGC could not call on the guarantees until there was an admitted or established breach of contract, the time at which an arbitral tribunal or court might determine that matter could well be after the performance guarantees had expired: cf Ideas Plus Investments at [39] per Steytler P. Such a construction does not, in my view, make commercial common sense: McCann v Switzerland Insurance Australia Limited (2000) 203 CLR 579 at [22] and [23] per Gleeson CJ.
40 The performance guarantees secured the Contractor's 12 month warranty under the Contract. Assume a major defect was discovered by ONGC late in the Warranty period, say only one month prior to expiry of the performance guarantees, but was not acknowledged by Clough as resulting from any failure by it to honour its commitments under the Construction Contract. On Clough's construction, it would not be open to ONGC to call on the performance guarantees until a Court or Tribunal had found a breach of contract. However, it is most unlikely that any such issue could be determined, especially in the context of a complex construction project, within a one month time frame. By the time it had been determined, in ONGC's favour, the guarantees would have expired, and the intended contractual security would be lost.
41 I consider that a commercial object of the requirement for performance guarantees under the Construction Contract is to allocate the risk of a party being out of pocket pending the resolution of any dispute and that ONGC was entitled to call upon the guarantees even where a genuine dispute existed, as to whether or not Clough was in breach and whether or not damages had been suffered: Fletcher Construction v Varsdorf at p 821 per Charles JA and at p 826 per Callaway JA. That caseconcerned irrevocable standby letters of credit. Nonetheless it is of assistance, in principle, in approaching the construction of the performance guarantees, which informs the construction of cl 3.3 as a whole and, for present purposes, cl 3.3.3 in particular.
42 Clough was required by cl 3.3.1 to furnish to ONGC within two weeks of signing the Construction Contract an "unconditional and irrevocable" performance bank guarantee for the due performance of the contract in terms of a proforma guarantee set out in an appendix to the Construction Contract. This lends force to ONGC's construction: Fletcher Construction v Varsdorf at p 822 per Charles JA. In that passage his Honour cited Hudson on Building and Engineering Contracts (para 17,075) which asserts that:
Insofar as a construction contract may make clear provision for the furnishing of an unconditional guarantee as security for due performance, the normal interpretation, … will be that, in response to the stipulated demand, an unqualified transfer of the sums in question is intended, provided only that there is a bona fide dispute or claim on the secured party's part, and that any further investigation of its merits or extent is not usually intended by the contract.
43 Bachmann Pty Ltd v B.H.P Power New Zealand Ltd [1999] 1 VR 420 involved consideration of a letter of credit. The supplier in Bachmann did not seek to establish any case of fraud on the purchaser's part but relied only on the contractual qualification upon the purchaser's powers under the general conditions of the underlying contract to demand payment under the letter of credit. It was conceded that the clause referred to constituted a contractual qualification on the purchaser's powers in relation to the security. This is to be contrasted with earlier Australian cases where the initial question was whether the underlying contract, on its proper construction, qualified the security holder's powers to claim under the security. The only point in the appeal as his Honour put it was as to the content of the qualification at [30].
44 His Honour canvassed a number of cases in which the proper construction of the language contained in the standby letter of credit, "… until the party becomes entitled to exercise a right under the contract …" had been similarly discussed. Those authorities range from requiring no more than a claimed entitlement which is not specious or fanciful: Hughes Bros Pty Ltd v Telede Pty Ltd (1989) 7 BCL 210 to requiring that the holder of the security establish, whether by litigation or arbitration, an actual entitlement to payment of the moneys: Mitsui Kensetsu Corporation Australia Pty Ltd v State of South Australia (unreported Qld Supreme Court, 9 August 1990 per Byrne J).
45 Ultimately, as a matter of construction of the particular standby letter of credit, his Honour concluded that as between the purchaser and the supplier, the purchaser was entitled to have recourse to the security where according to a bona fide claim made by the purchaser monies were due to it from the supplier which exceeded any monies due from it to the supplier at [53].
46 In Ideas Plus InvestmentsSteytler P, with whom McLure and Buss JJA agreed, concluded that the NAB was empowered to claim under a letter of credit granted by HSBC so long as it had a bona fide belief that the conditions were satisfied. The certificate by the NAB issued to HSBC certifying in effect that the conditions of the letter of credit had been met was only a representation of such a bona fide belief and perhaps that there were reasonable grounds for such a belief. [55]-[57], [105] See also Fletcher Construction v Varsdorf at p 830. Steytler P with whom McLure JA agreed held that the basis for the payment made by HSBC pursuant to its independent obligation to NAB under the letter of credit was the provision by NAB of a certificate in the required terms. It was, his Honour found, the presentation of that certificate, not the truth of the facts certified, which conditioned HSBC's obligation to pay.
47 The provision of cll 3.2.3-3.2.5 and 8.3.5 do not, in my view, assist the construction contended for by Clough. Those concern the contractual entitlement of ONGC to withhold approval and payment of progress claims. That entitlement provides a form of security to ONGC where there is a dispute because, pending arbitration, it is not required to pay the disputed amounts to Clough. It does not inform the question of the circumstances in which the performance guarantees may be called upon.
48 Nor do I consider that the absence of an independent certification as to the existence of a certain state of affairs to trigger the obligation to make payment advances Clough's argument on construction. That is but one type of mechanism for payment in a contract. Its absence does not assist the construction of this contract.
49 The fact relied upon by Clough that ONGC has the right variously to deduct monies (e.g. cll 5.9.7.2 and 7.3.9) or that Clough is required to pay certain monies, irrespective of the existence of a dispute (e.g. cl 6.1.2) actually serves, in my opinion, to reinforce the view that one of the purposes of the performance guarantees is to allocate the risk to which I have referred: Fletcher Construction v Varsdorf at p 829 per Callaway JA, Batt JA concurring.
50 The entitlement of ONGC, under cl 6.3.2, to payment of contractually ascertained and agreed liquidated damages equal to 3% of the total contract price for each month of delayed completion of the entire Works or a part of these, and to recover these by a call upon the performance guarantees, is also of no assistance to Clough's contentions. The clause is but an example of a particular circumstance when the performance guarantees may be called upon and puts that entitlement beyond doubt. It does not, in my opinion, assist Clough's construction of cl 3.3.
51 Clough submits that ONGC's construction would permit a call on the full amount of the performance guarantees, approximately US$21.5 million even in the case of a trivial or ephemeral breach, and that this would be a peculiar result.
52 As to this, it should be recognised that equity will generally intervene to ameliorate the application of a legal right if it is employed capriciously or unreasonably or harshly, or oppressively such as to be unconscionable: Pierce Bell Sales Pty Ltd v Frazer (1973) 130 CLR 575 at 587-588 and 590-591; NC Seddon & MP Ellinghaus, Cheshire & Fifoot's Law of Contract (8th Aust. ed) (2002), [20.9]. This doctrine, although distinct from, is very similar to, the implied contractual duty of good faith: Walker v ANZ Banking Group Ltd (No 2) (2001) 39 ACSR 557, [93]-[96], esp. [96]; Australian Competition and Consumer Commission v Samton Holdings Pty Ltd (2002) 117 FCR 301. Section 51AA of the TPA likewise may afford relevant protection. This however does not mean that the entitlement at law to call on the whole amount under the performance guarantees should be read down from what is otherwise a construction which is in harmony with the contract as a whole and which in its context produces a commercially sensible meaning. Furthermore, to the extent that the calling up of the performance guarantees resulted in an overpayment to ONGC then there would be an entitlement in Clough to an 'accounting' in due course from ONGC: Cargill International SA Antigua Geneva Branch v Bangladesh Sugar & Food Industries Corporation [1996] 4 All ER 563 at 571.
53 Accordingly, in my opinion, upon the proper construction of cl 3.3.3, ONGC was entitled to call on the performance guarantees where it had a bona fide belief in the genuineness of its claim that Clough had failed to honour commitments under the Construction Contract.
54 Of course, even on Clough's case, ONGC was entitled to call on the performance guarantees in the case of demonstrated breach, not caused by ONGC's breach. I will consider that important question in the context of the following analysis of the claims by Clough that ONGC, in making demands, under the performance guarantees was acting in contravention of s 51AA of the TPA.
55 It follows that I do not consider there to be a prima facie case or a serious issue to be tried as to the construction contended for by Clough.