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[2017] WASC 112
Supreme Court of WA
2017-04-20
Miere J
Original judgment source is linked above.
1 The Ichthys LNG Project is a huge oil and gas project in northern Australia. The project includes an onshore processing facility. The defendant, JKC, is the head contractor responsible for the delivery of the project to its owner, Inpex Australia. The plaintiff, CPB, entered a contract (Subcontract) with JKC to perform engineering, procurement, construction and commissioning works relating to the onshore buildings associated with the project. The Subcontract is comprised of a number of documents including Subcontract General Terms & Conditions (General Terms), Schedule of Compensation and Work Time Schedule.
2 JKC has demanded from CPB payment of liquidated damages of $39,225,000. CPB disputes JKC's entitlement to the liquidated damages by reason of a dispute arising from JKC's assessment of CPB's claims for extensions of time. CPB fears that JKC will have recourse to bank guarantees procured by CPB in favour of JKC pursuant to the terms of the Subcontract to recover the amount of liquidated damages JKC has demanded from CPB.
3 CPB says that JKC is not entitled to have recourse to the bank guarantees unless and until it has been established that the amount demanded is actually or objectively payable by CPB to JKC. CPB seeks an interlocutory injunction to restrain JKC from demanding payment by the bank under the bank guarantees.
4 For the reasons which follow CPB's application for an interlocutory injunction will be dismissed. CPB has not made out a prima facie case that JKC is not entitled to call on the bank guarantees and in any event the balance of convenience favours the refusal of an interlocutory injunction.
5 Article 15.1 of the General Terms provides that Subcontractor (CPB) must perform the works in accordance with the Work Time Schedule and each separate designated part of the works on or before the key dates and times for completion including Milestone Dates and Completion Dates set out in the Work Time Schedule.
6 Article 15.4 provides that if Subcontractor can demonstrate that the Completion Dates or Milestone Dates will be delayed due to one or more of the specified reasons affecting the critical path of the Latest Work Time Schedule, Subcontractor is entitled to a time extension to the Completion Dates and Milestone Dates with the corresponding modification to the Work Time Schedule for that part of the work so affected.
7 CPB made a number of claims on JKC. On 27 October 2014 CPB and JKC entered into a deed of settlement which amended the terms of the Subcontract by extending six Milestone Dates and Completion Dates. On 10 May 2016 CPB and JKC entered into a deed of amendment (Amendment Deed) which sets a minimum subcontract price of $261 million.
8 A Provisional Acceptance Certificate is a certificate issued by Contractor to Subcontractor specifying any respect in which the works do not conform to the Subcontract. Subcontractor must make good and indemnify Contractor against any defects for an initial Warranty Period of 12 months from the effective date of the Provisional Acceptance Certificate. The Warranty Period may be extended but is limited to a maximum duration of 24 months from the effective date of the Provisional Acceptance Certificate.
9 Article 34 deals with invoicing and payment procedures. Article 34.5 provides that Contractor may deduct from any sums due to Subcontractor any sums due to Contractor by Subcontractor under the Subcontract including any sums due as a result of the matters specified. Article 34.5(c) provides that if sums due by Subcontractor exceed the amount of sums due by Contractor, Subcontractor must immediately pay the difference to Contractor.
10 By Article 35 Subcontractor agrees to provide irrevocable guarantees by an approved financial institution 'payable on first demand of Contractor' and a Parent Company Guarantee 'to guarantee the due performance of Subcontractor's obligations under the Subcontract'. The irrevocable guarantees are referred to in the General Terms as Bank Guarantees. Article 35.1(a) provides for the form of Bank Guarantees that must be provided. Article 35.1(a)(iii) provides that each Bank Guarantee must contain an unconditional and irrevocable undertaking by the financial institution to pay to Contractor the amount of the security on demand without notice being given to Subcontractor by the financial institution or Contractor. Annexure 1A is a proforma bank guarantee which Article 35.1(a)(iii) states is approved. The proforma bank guarantee includes the following provisions:
11 Article 35.3 deals with demands by Contractor for payment under the Bank Guarantee. The proper construction of Article 35.3(a) is one of the main issues in this case. Article 35.3(a) is:
Contractor may have recourse to the Bank Guarantee(s) at any time in order to recover any amounts that are payable by Subcontractor to Contractor on demand.
A further issue is the proper construction of Article 35.3(b) and whether it is enforceable or unenforceable on the ground that it purports to oust the jurisdiction of the court. Article 35.3(b) is:
Subcontractor waives any right that it may have to obtain an injunction or any other remedy or right against any party in respect of Contractor having recourse to the Bank Guarantee(s).
12 Article 35.4 provides for Contractor dealing with the proceeds of payments received by Contractor from a call on a Bank Guarantee or Parent Company Guarantee. Article 35.4(a) provides that the balance of the proceeds (if any) after deducting amounts due and payable to Contractor by Subcontractor must be deposited by Contractor into an interest bearing bank account. Any interest accrued on the account balance must be retained by Contractor and the account added to the balance of the proceeds held. Contractor is entitled to withdraw from the account amounts due and payable to it by Subcontractor from time to time. Neither Contractor nor the bank by whom the proceeds are held is deemed to hold the proceeds (or balance from time to time) on trust for Subcontractor but Contractor must pay the balance in the account (if any), including all accrued interest, to Subcontractor on expiry of the Warranty Period.
13 Article 36 provides for liquidated damages. Article 36.1 provides that if Subcontractor fails to complete the relevant part of the works by the relevant Completion Date or Milestone Date then Subcontractor will pay liquidated damages to Contractor in accordance with the Schedule of Compensation. Clause 5.2 of the Schedule of Compensation provides that Subcontractor's obligation to pay liquidated damages for late completion is capped at 15% of the Subcontract Price in the aggregate. After amendments to the Subcontract Price, the liquidated damages cap is $39,225,000.
14 Article 57 is a dispute resolution provision. Article 57(a) to (c) provides that in the event of a Dispute, either party may give the other party a notice, the parties must endeavour to settle the Dispute by negotiation and endeavour to do so within 35 days from receipt of the notice of Dispute. Dispute is defined widely. It means 'any dispute (of every kind or type, whether based on contract, tort, statute, regulation, equity or otherwise) arising out of, relating to, or connected with the Subcontract, or the operations carried out under the Subcontract, including but not limited to any dispute concerning the existence, validity, interpretation, performance, breach or termination of the Subcontract'. Article 57(d) is an arbitration agreement. It provides that all disputes are to be settled by final and binding arbitration. If the parties fail to settle the Dispute by negotiation within 35 days from receipt of the notice of Dispute, either party may refer the Dispute to international arbitration. The arbitration will be conducted in accordance with the Rules of Arbitration of the International Chambers of Commerce (ICC Rules). Singapore will be the place of the arbitration. The arbitration will be conducted in English. Article 57(m) provides that neither party is prevented or restrained by operation of Article 57 from applying to a court to seek urgent relief (including injunction or conservatory measures). The parties refer to that specific provision as a carve out.
15 Pursuant to its obligation under Article 35 of the Subcontract CPB procured Swiss Re International SE, a company incorporated in Luxembourg to deliver to JKC on 12 October 2012 two unconditional undertakings by each of which Swiss Re undertook to pay upon demand from JKC any amount not exceeding $6,363,091.05. On 24 May 2016, in accordance with the terms of the Amendment Deed CPB procured Swiss Re to deliver to JKC two further unconditional undertakings by which Swiss Re undertook to pay to JKC upon demand any amount that does not exceed $6,686,936.00. I will refer to the four unconditional undertakings as the Bonds. The Bonds are in the same terms as the proforma bank guarantee at Annexure 1A of the Subcontract.
16 Between April 2015 and December 2016 CPB submitted eight extension of time claims (EOT claims). JKC rejected entirely three of the EOT claims and granted time extensions and delay costs in relation to the remaining EOT claims.
17 Between 24 March 2016 and 23 February 2017 CPB issued notices of dispute under Article 57 of the Subcontract in relation to JKC's rejection or assessment of CPB's first eight EOT claims. CPB has made a further EOT claim which has been rejected by JKC and will become the subject of arbitration.
18 On 28 February 2017 JKC wrote to CPB stating the Completion Dates incorporating extensions granted to CPB and stating that none of them had been achieved. JKC stated that CPB is liable to pay liquidated damages to JKC in the amount of $39,225,000. JKC demanded CPB pay JKC liquidated damages in the sum of $39,225,000 pursuant to Article 36 and the Schedule of Compensation. JKC demanded payment within 14 days.
19 On 2 March 2017 CPB wrote to JKC saying it had inadequate time to respond to JKC's claim and in the meantime requests JKC undertake that it will refrain from taking any adverse action or steps in reliance on its demand for liquidated damages until it has received and considered CPB's response. On 6 March 2017 JKC said that as a result of the dispute over CPB's EOT claims, JKC's liquidated damages claim was necessarily in dispute. JKC declined to offer any undertakings.
20 On 10 March 2017 CPB wrote to JKC setting out in detail the reasons CPB asserts JKC has no present entitlement to liquidated damages and pursuant to Article 57(a) disputing the amount of liquidated damages demanded by JKC. CPB required JKC to either withdraw its demand for payment of liquidated damages or provide an undertaking that it has no intention to pursue payment of liquidated damages including by way of relief by making demand for payment under the Bank Guarantees. On 16 March 2017 JKC replied. JKC took issue with CPB's assertion about CPB's entitlement to extensions of time and its defence to JKC's claim for liquidated damages. JKC said that it will not withdraw its demand for payment of liquidated damages nor will it provide any undertakings.
21 On 16 March JKC wrote to CPB stating that the due date for payment of liquidated damages has passed, liquidated damages in the sum of $39,225,000 are due and payable and JKC reserves all of its right including under Article 35.3 of the Subcontract (recourse to the Bank Guarantees). On 17 March CPB again wrote to JKC. CPB noted that JKC has reserved its rights pursuant to Article 35.3 and required JKC to confirm it has no intention of calling on CPB's security. CPB stated that it reserves its rights including with respect to any urgent relief which may become necessary.
CPB gives notice of dispute about recourse to Bank Guarantees
22 On 18 March 2017 CPB issued a Notice of Dispute under Article 57 (the Bond Dispute Notice). The notice stated that the dispute relates to JKC's entitlement to call on the Bonds in reliance on its demand for the payment of liquidated damages under Article 36.1 in the sum of $39,225,000. In a letter to JKC also on 18 March 2017 CPB requested JKC provide an undertaking within 48 hours that it will not call on the Bonds to satisfy its disputed entitlement to liquidated damages or that it give three days' notice of its intention to call on the Bonds. On 20 March 2017 JKC responded. JKC stated that it has not made any call on the Bonds pursuant to Article 35.3(a). JKC asserted that as it had not made any such call, Article 57 of the Subcontract is not yet properly engaged and any attempt by CPB to engage Article 57 in relation to JKC's entitlement under Article 35 is premature. Further, JKC stated that engagement of the Article 57 process on the question of entitlement to call on the Bonds would defeat the very purpose of the security provided under Article 35 and JKC will not provide any undertakings. JKC added that if CPB deems it necessary and desirable, JKC 'remains willing to discuss matters generally with respect to the Subcontract, including in relation to the impending completion of the physical works and the Security'. JKC added that it reserves all of its rights.
23 Later on 20 March CPB commenced this proceeding. CPB claims an injunction restraining JKC from demanding or receiving any payment from Swiss Re pursuant to the Bonds until after the determination of the validity and extent of the EOT claims made by CPB by agreement or by final and binding arbitration under Article 57. CPB claims alternatively an injunction requiring JKC to comply with the dispute resolution process in Article 57 in respect of the disputes described in the Bond Dispute Notice and restraining JKC from taking any step (including calling upon the Bonds) which would prevent JKC from complying with the dispute resolution process in Article 57 in respect of the Bond Dispute Notice.
24 At the same time CPB filed a chamber summons for an interlocutory injunction in which it sought the same relief it seeks in the writ. CPB also filed a certificate of urgency in which it stated that the application is of such an urgent nature that it is required to be listed and heard immediately and a memorandum, as required by O 59 r 9(2) of the Rules of the Supreme Court 1971 (WA) (RSC) setting out CPB's intention to move the court to waive the operation of RSC O 59 r 9(1). In the memorandum CPB stated that it has grounds to believe that JKC is either in the process of, or shortly intends to, call on the security and any delay in seeking the relief is likely to prejudice its ability to seek injunctive relief as it may allow JKC to call on the security before it can be restrained from doing so.
25 On 21 March 2017 I granted an ex parte interim injunction restraining JKC from demanding or receiving payment under the Bonds. On 22 March I extended the operation of that interim injunction until CPB's application for an interlocutory injunction could be heard.
26 CPB now seeks an interlocutory injunction restraining JKC from demanding or receiving any payment from Swiss Re pursuant to the Bonds and further or alternatively an interlocutory injunction requiring JKC to comply with the dispute resolution process in Article 57 in respect of the disputes described in the Bond Dispute Notice and restraining JKC from taking any step (including calling upon the Bonds) which would prevent JKC from complying with the dispute resolution process in Article 57 in respect of the Bond Dispute Notice.
27 CPB puts its case on two bases. The first is that the Subcontract which underlies the Bank Guarantees contains an implied negative stipulation that JKC will not demand payment under the Bank Guarantees unless objectively an amount is payable by CPB to JKC on demand. By 'objectively payable' CPB means authoritatively established, that is by agreement or determination by an arbitrator or court.
28 CPB says that there is a prima facie case that no amount is payable by CPB to JKC on demand. If those two propositions are correct then JKC would breach the Subcontract by demanding payment under the Bank Guarantees. The court may grant an interlocutory injunction in its auxiliary jurisdiction to restrain that breach of contract.
29 The second basis of CPB's case is that there is a dispute over the proper construction of Article 35.3(a) of the Subcontract which must be resolved in accordance with the dispute resolution process prescribed in Article 57 of the Subcontract. The final determination of the proper construction and application of Article 35.3(a) has been committed to arbitration and cannot be determined by this court. If JKC was able to call upon the Bank Guarantees it would be unable to comply with the dispute resolution process. JKC should be restrained from ignoring the dispute resolution process and calling upon the Bank Guarantees.
30 JKC says that these proceedings should be stayed and the parties referred to arbitration because the dispute between the parties is the subject of an arbitration agreement. JKC puts forward two arguments in support of a stay. First, any interim relief, including urgent relief, in respect of JKC's right to have recourse to the Bonds should only be sought from an arbitral tribunal. Secondly, CPB is not entitled to seek the relief sought from the Court as the relief sought is not urgent and therefore the carve out in Article 57(m) of the general terms has no application.
31 JKC says alternatively that CPB's application for an injunction should be dismissed for the following reasons. The Court should proceed to determine the proper construction of Article 35.3(a). On the proper construction of Article 35.3(a), the Bonds are intended to operate as a risk allocation device pending the final determination of the dispute between the parties, not just as a security against the risk that recovering damages from CPB may prove difficult. There is no negative stipulation in Article 35.3(a) as contended for by CPB.
32 I will first consider JKC's claim that the proceedings should be stayed and referred to arbitration pursuant to s 7(2) of the International Arbitration Act 1974 (Cth) (IA Act).
33 Section 7(2) of the IA Act has the effect that the court must stay any proceeding which involves the determination of a dispute within the scope of an arbitration agreement to which the section applies and refer the parties to arbitration. The arbitration agreement in Article 57(d) is an arbitration agreement to which s 7 of the IA Act applies. However, for the reasons which I will now explain, the relief sought by CPB in this application is outside the scope of the arbitration agreement.
34 Article 57(d) provides that all Disputes are to be settled by arbitration. Disputes is widely defined. It is common ground that the dispute between the parties concerning the interpretation of Article 35.3 and whether JKC is entitled to have recourse to the Bonds to recover the amount it claims as liquidated damages are Disputes for the purposes of the arbitration agreement in Article 57(d). However, Article 57(m) provides that neither party is prevented or restrained by operation of Article 57 from applying to a court to seek urgent relief (including injunction). As I have said, the parties refer to that provision as a carve out.
35 CPB says that its application for an interlocutory injunction is an application seeking urgent relief and falls within the carve out. Therefore, the arbitration agreement in Article 57(d) does not apply to CPB's application for injunctive relief.
36 The carve out in Article 57(m) covers an application to a court 'to seek urgent relief (including injunction ...)'. The relief sought must be urgent. An urgent injunction is archetypal urgent relief. Furthermore, the relief sought by CPB was urgent.
37 The Court of Appeal of Victoria considered the concept of urgent relief in an arbitration provision in AED Oil Ltd v Puffin FPSO Ltd [2010] VSCA 37; (2010) 27 VR 22. The arbitration agreement included a clause which provided:
Nothing in this Article 33 prevents a party from seeking urgent interlocutory or declaratory relief from a court of competent jurisdiction where, in that party's reasonable opinion, that action is necessary to protect that party's rights.
In our opinion, the article, by its terms, contained two requirements. First, that the relief was in fact urgent, a matter to be determined objectively. Secondly, that the party claiming the relief formed a reasonable opinion that the relief was necessary to protect that party's rights.
There is no requirement in Article 57(m) that the party applying for urgent relief form an opinion that action is necessary to protect that party's rights. Nevertheless, in my opinion, whether the relief sought by CBP is 'urgent relief' is to be determined objectively. For a matter to be urgent it must be 'pressing; compelling or requiring immediate action or attention': Online Macquarie Dictionary.
38 I accept that the interlocutory relief sought is urgent. JKC may make demand on Swiss Re to pay the amount of the Bonds to JKC without notice to CPB. Upon receipt of such a demand Swiss Re is obliged to pay the amount demanded, up to the amount of the Bonds, to JKC without enquiry or notice to CPB. On 16 March JKC stated to CPB that liquidated damages in the sum of $39,225,000 are due and payable and JKC reserves all of its rights including under Article 35.3 of the Subcontract, that is the right to demand payment under the Bonds. On 18 March CPB issued a notice of dispute under Article 57 in relation to JKC's entitlement to call on the Bonds in reliance on its demand for the payment of liquidated damages. In response JKC stated that it had not made any call on the Bonds and further stated that the engagement of the Article 57 process on the question of entitlement to call on the Bonds would defeat the very purpose of the security provided under Article 35 and JKC would not provide any undertakings not to call on the Security. In effect, JKC asserted that it was entitled to call on the Bonds notwithstanding that CPB had initiated a dispute and put in train the dispute resolution process in relation to JKC's right to call on the Bonds.
39 The refusal of a party to give an undertaking not to call on a security is not a threat to call on the security. However, the circumstances where JKC could receive and demand payment under the Bonds without notice to CPB and has asserted its right to do so notwithstanding that CPB has invoked the dispute resolution process requires immediate action by CPB to prevent JKC taking those steps. On 20 March 2017 JKC said that it remained willing to discuss matters generally with respect to the Subcontract including in relation to the Security. However, JKC added that it reserves all of its rights. In the absence of any statement that JKC did not intend to call on the Bonds before such discussions, the relief sought by CPB was urgent.
40 JKC submitted that there is no evidence that the dispute cannot be resolved urgently by arbitration. Article 57(m) does not require that the dispute cannot be resolved urgently by arbitration or that an application to the court is the only available means for obtaining urgent relief. The only requirement is that the relief sought is urgent. Article 57(m) provides for the application to a court for urgent relief to run in parallel with the dispute resolution procedure, including disputes not resolved by negotiation being settled by final and binding arbitration.
41 JKC submitted in effect that CPB did not act urgently in bringing these proceedings. I do not agree. CPB commenced these proceedings and applied for an interim injunction urgently after the circumstances arose which gave rise to the real risk that JKC might call on the Bonds.
42 I find that CPB's application for an interlocutory injunction falls within the carve out in Article 57(m). The power and obligation of the court under s 7(2) of the IA Act to stay the proceedings and refer the parties to arbitration is not enlivened.
43 JKC says that the effect of Article 35.3(b) is that CPB has waived the right to seek from the Court an injunction to restrain JKC from making demand for payment or receiving payment under the Bank Guarantees and that CPB can only seek such relief from an arbitral tribunal. Article 35.3(b) is:
Subcontractor waives any right that it may have to obtain an injunction or any other remedy or right against any party in respect of contractor having recourse to the Bank Guarantee(s).
44 The waiver is in absolute terms. Subcontractor waives 'any right that it may have' to obtain 'an injunction or any other remedy or right' against 'any party in respect of' Contractor having recourse to the Bank Guarantee(s)'. Both parties agree that if the clause is construed according to its natural and ordinary meaning then it is an impermissible ouster of the court's jurisdiction and is invalid and unenforceable. However, both CPB and JKC say that the clause is to be read down so that it is not an impermissible ouster of the court's jurisdiction.
45 JKC says that applying 'the presumption of legality' to the construction of the Subcontract, Article 35.3(b) should be construed so as to be lawful. Senior counsel for JKC, Mr S K Dharmananda SC, referred to Lewison and Hughes The Interpretation of Contracts in Australia at [7.10] and the authorities referred to there in support of its submission. The principle stated by Lewison and Hughes is:
Where the words of a contract are capable of two meanings, one of which is lawful and the other unlawful, the former construction should be preferred.
46 The primary authorities referred to by Lewison and Hughes in support of that principle are the dissenting judgment of Mason P in Global Network Services Pty Ltd v Legion Telecall Pty Ltd [2001] NSWCA 279 (Global Network Services) at [102] and the judgment of Muir J at first instance in Queensland Alumina Ltd v Alinta DQP Pty Ltd [2006] QSC 391 (Queensland Alumina) at [97].
47 In the passage in Global Network Services referred to, Mason P said that the absolute construction contended for by the appellant involved the parties promising in effect that one will act in a grossly uncommercial way that would involve unlawful activity on the respondent's part and complicity on the appellant's part. Unless driven to such an outcome by intractable language such a construction should be rejected having regard to the principle that, where the words of a contract are capable of two meanings, one lawful and the other unlawful, the former construction should be preferred. The majority, Meagher and Beasley JJ, held that the clause in question was unambiguous, wide and comprehensive: [114], [121]. Hence, the majority did not restrict the meaning of the clause so as to adopt a construction that did not involve unlawful activity.
48 In Queensland Alumina Muir J at [97] said that where the words of a contract are cable of two meanings, one lawful and the other unlawful, the former construction should be preferred. His Honour cited as authority for that principle the statement of Mason P in Global Network Services and a statement to that effect in Lewison The Interpretation of Contracts (2nd ed). On appeal Holmes JA referred to authorities cited by the respondents for the proposition that contracts should be interpreted so as to give effect to all their clauses and to Pagnan SpA v Tradax Ocean Transportation SA [1987] 3 All ER 565 (Pagnan) which involved the construction of a contractual condition on its face at odds with a condition in a document incorporated into the contract by reference. In Pagnan the Court held that the apparent conflict could be reconciled by reading the first condition, imposing an apparently absolute obligation, as qualified by the other, providing for excuse from liability in some circumstances.
49 CPB says that on its proper construction Article 35.3(b) means that CPB cannot seek an injunction to prevent JKC calling upon the security where JKC has a right to have recourse to the Bank Guarantees. In other words, it means that CPB cannot stop JKC having recourse to the Bank Guarantees if JKC has established a right to do so and therefore the Article supports the efficacy of the Bank Guarantees. I am unable to hold that by Article 35.3(b) the parties agreed that the only right which CPB waived was the right to obtain an injunction where JKC has established a right to have recourse to the Bank Guarantees.
50 Article 35.3(b) is not capable of the meaning for which CPB contends. The words 'any right that it may have to obtain an injunction ... in respect of Contractor having recourse to the Bank Guarantee(s)' cannot sensibly be construed to be restricted to a right to obtain an injunction in respect of Contractor having recourse to the Bank Guarantees where Contractor has established that it has a right to have recourse to the Bank Guarantees. Furthermore, CPB waives 'any right that it may have' to obtain an injunction or other remedy. If it has been established that JKC has a right to have recourse to the Bank Guarantees then CPB has no right to obtain an injunction or any other remedy in respect of JKC having recourse to the Bank Guarantees. CPB may only waive a right if it has that right. It makes no sense, and gives no practical content, to interpret the Article to mean that CPB only waives the right to obtain an injunction or a remedy where it has, in effect, been established that CPB has no such right.
51 JKC says that Article 35.3(b) should be interpreted as a waiver of the right to seek urgent relief otherwise provided for in Article 57. That is, CPB waives any right that it might have to seek urgent relief from a court pursuant to Article 57(m) in relation to the Bank Guarantees. Article 35.3(m) is not capable of that restricted meaning. It is inconsistent with the words 'any right'. Article 35.3(b) does not refer to curial relief. On its face, it prevents CPB seeking relief from an arbitral tribunal which is not the right dealt with in Article 57(m). Further, CPB waives any right to obtain any remedy which on its face includes an award of damages or relief other than urgent relief which is the subject of Article 57(m).
52 On its proper construction Article 35.3(b) provides that Subcontractor waives any right that it may have to obtain an injunction or any other remedy from a court or an arbitral tribunal and waives any right against any party, including Contractor and the bank issuing the Bank Guarantees, in respect of Contractor having recourse to the Bank Guarantees.
Impermissible ouster of the jurisdiction of the court
53 It is common ground that if Article 35.3(b) is construed to have the meaning which it appears to have on its face then it is an impermissible ouster of the court's jurisdiction to grant the only appropriate remedy. Those concessions are properly made.
54 The general principle is that contracts which seek to oust the jurisdiction of the courts are invalid. On the other hand, limitations placed on the rights and remedies available to the parties have not been treated as an ouster of the court's jurisdiction. In Dobbs v National Bank of Australasia Ltd [1935] HCA 49; (1935) 53 CLR 643 Rich, Dixon, Evatt and McTiernan JJ said that negative restrictions upon the right to invoke the jurisdiction of the courts have always been invalid. Their Honours said at 652:
No contractual provision which attempts to disable a party from resorting to the Courts of law was ever recognized as valid. It is not possible for a contract to create rights and at the same time to deny to the other party in whom they vest the right to invoke the jurisdiction of the Courts to enforce them.
What no contract can do is take from a party to whom a right actually accrues, whether ex contractu or otherwise, his power of invoking the jurisdiction of the Courts to enforce it.
55 In Bateman Project Engineering Pty Ltd v Resolute Ltd [2000] WASC 284 Owen J held that a clause in a contract which provided that the principal was entitled to convert a bank guarantee and the contractor shall not hinder, obstruct, restrain or injunct the principle from doing so was an ouster of the jurisdiction of the court and void as being against public policy. The provision affected one aspect of the contractual rights arising under the contract, namely the right of the plaintiffs to have the guarantee called on only in strict accord with the relevant terms of the contract. While the right to have the overall dispute between the parties adjudicated in the court survived, so far as concerns the guarantee it was defeated. The contractual provision took away from a party to whom a right accrues his power of invoking the jurisdiction of the courts to enforce it.
56 In this case Article 35.3(b) takes away from CPB its right to enforce all and any rights it may have in respect of JKC having recourse to the Bank Guarantees. The provision takes away not only CPB's right to obtain an injunction to restrain JKC from having recourse to the Bank Guarantees unlawfully but also CPB's right to obtain damages, or any other remedy, in respect of JKC's breach of contract in having recourse to the Bank Guarantees in breach of the relevant terms of the Subcontract. The provision takes away CPB's right to compel performance of JKC's contractual obligations in respect of having recourse to the Bank Guarantees. Article 35.3(b) is a provision which ousts the jurisdiction of the court and is void.
57 The next issue is whether CPB has made out a case for an interlocutory injunction to restrain JKC from demanding or receiving payment under the Bank Guarantees.
58 The principles governing the grant of an interlocutory injunction were set out by the High Court in Beecham Group v Bristol Laboratories Pty Ltd [1968] HCA 1; (1968) 118 CLR 618 and reaffirmed in Australian Broadcasting Corporation v O'Neill [2006] HCA 46; (2006) 227 CLR 57 (O'Neill). Before the court will exercise its discretion to award an interlocutory injunction, a plaintiff must satisfy the court that:
59 The requisite strength of the probability of ultimate success depends upon the nature of the rights asserted and the practical consequences likely to flow from the interlocutory order sought: O'Neill at [71] [72] (Gummow & Hayne JJ). The first of those matters, the reference to the nature of the rights asserted by the plaintiff, directs attention to the relief sought in this application an injunction to restrain the beneficiary of a Bank Guarantee demanding payment under the Bank Guarantee. The second matter, the reference to practical consequences, directs attention to the likelihood that the grant or refusal of the interlocutory injunction would dispose of the action finally.
Article 57 does not require injunction pending arbitration
60 The dispute about the proper construction of Article 35.3(a) and JKC's right to call on the Bonds is the subject of the Bond Dispute Notice which initiates the dispute resolution process under Article 57 leading to arbitration if the parties fail to settle the dispute by negotiation. CPB says that JKC must observe the process for resolving the disputes about the construction and application of Article 35.3 contained in Article 57. CPB says that the final determination of the proper construction and application of Article 35.3(a) has been committed to arbitration and cannot be determined by this court. That arbitration cannot occur until after certain preliminary steps to try and resolve the dispute have been taken. CPB says that if JKC calls upon the Bonds, it would be unable to comply with the dispute resolution process which it has agreed to observe. Therefore, CPB says, JKC should be restrained from calling on the Bonds until its right to do so has been resolved by negotiation or determined by arbitration.
61 I do not accept CPB's argument. No part of Article 57 or any other provision of the Subcontract restrains Contractor from exercising any right under the Subcontract merely upon Subcontractor giving notice of a dispute in which Subcontractor asserts that Contractor is not entitled to exercise the right. JKC may exercise any rights it has under the Subcontract unless and until it is restrained from doing so by an order of a court or arbitrator notwithstanding that CPB has invoked the dispute resolution process.
62 CPB's case is that there is a prima facie case that on its proper construction Article 35.3(a) contains an implied negative stipulation that JKC will not demand payment under the Bank Guarantees unless objectively an amount is payable by CPB to JKC on demand and that no amount is payable by CPB to JKC on demand. If those two propositions are correct then JKC will breach the Subcontract by demanding payment under the Bank Guarantees. The court may grant an interlocutory injunction in its auxiliary jurisdiction to restrain that breach of contract. JKC says that on its proper construction Article 35.3(a) contains no such implied negative stipulation.
63 A plaintiff applying for an interlocutory injunction must establish a sufficient likelihood of success to justify in the circumstances the preservation of the status quo pending trial: O'Neill at [65]. Where an application for an interlocutory injunction depends on the construction of the contract, the judge must determine whether to construe the contract on a prima facie or final basis. In Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [2015] VSCA 98 at [53] Osborn and Ferguson JJA said, in a case in which a contractor sought to restrain an owner from having recourse to performance securities provided under a building contract, that the ordinary practice in a case such as that is to construe the contractual terms which bear on the basic issues in the case and which are capable of construction in the absence of further evidence. Kaye JA said at [111] that ordinarily on an application for an interlocutory injunction to restrain recourse to security provided under a building contract, the court should determine the controversial issue of law, if the determination of that issue is a necessary step to a conclusion whether an applicant is entitled to the injunction, unless, in the particular circumstances of the case, it is not practicable or appropriate to do so.
64 There is no reason why it is not practicable or appropriate to determine the construction of Article 35.3(a) in this application. Neither party submitted that the question of construction depends on any material extrinsic to the subcontract.
65 CPB submits that the court should only construe Article 35.3(a) on a prima facie basis because the proper construction is the subject of a dispute and will ultimately be determined by an arbitrator in accordance with Article 57. I do not accept that argument. CPB has commenced this action in which it seeks a final injunction restraining JKC from calling on the Bonds until after the determination of validity and extent of the EOT claims made by CPB. Its entitlement to that injunction depends upon Article 35.3(a) being construed to mean that that Contractor may not call on the Bank Guarantees unless the amount for which payment is demanded is 'actually and indisputably' due. The proceeding commenced by CPB requires the court to determine on a final basis the very question which CPB says the court should not resolve on a final basis. Furthermore, CPB has sought urgent injunctive relief on the ground that its application for an interlocutory injunction falls within the carve out of Article 57(m). The parties have agreed by Article 57(m) that the dispute resolution process in Article 57 does not constrain a party from seeking urgent relief from a court. That invokes the ordinary procedures and practices of the court. Those practices include that ordinarily on an application for an interlocutory injunction to restrain recourse to security provided under a contract, the court should determine a controversial issue of law, if the determination of that issue is a necessary step to a conclusion whether an applicant is entitled to the injunction, unless, in the particular circumstances of the case, it is not practicable or appropriate to do so. The circumstances of this case do not render it inappropriate to determine the construction of Article 35.3(a) on the final basis. CPB has invoked the jurisdiction of the court to restrain JKC calling on the Bonds. JKC is entitled to call on the Bonds unless, amongst other things, CPB's construction of Article 35.3(a) is correct. It is inappropriate for the court to restrain JKC from calling on the Bonds without determining the proper construction of Article 35.3(a) when it is practicable to do so.
66 The decision to grant or refuse the interlocutory injunction sought may in a practical sense determine the substance of the matter in issue. It is appropriate to determine the construction of Article 35.3(a) on a final basis.
Stopping payment under performance bonds - authorities
67 Both parties referred to authorities concerning the approach of courts to applications to restrain payment under a performance bond. It is convenient to first refer to the 'autonomy principle'. The autonomy principle is that the promise of the bank embodied in an unconditional undertaking or guarantee payable on first demand is independent of the contract between the parties which give rise to the undertaking or guarantee. The bank's promise is to pay against a written demand from the beneficiary, that is, the person to whom the promise is made. In the absence of fraud, the bank is neither required nor permitted to make any other investigation or inquiry or to notify the applicant, that is, the party whose obligation is supported by the guarantee, before satisfying the demand. The autonomy principle makes it practically almost impossible to prevent the bank from making payment against a proper written demand.
68 The applicant may seek to prevent the beneficiary from calling on the guarantee notwithstanding the autonomy principle. Injunctions restraining beneficiaries from calling on performance bonds have been granted in Australia where the demand is fraudulent, where the demand is unconscionable or where the underlying contract between the parties contains conditions preventing the beneficiary from calling on the guarantee, that is the contract contains a negative stipulation that the beneficiary will not demand a payment under the guarantee unless a certain condition is satisfied. In 'Performance Bonds: Preventing Payment' (2014) 25 JBFLP 124 Alan Tyree says that in Australia the origins of injunctions being granted against beneficiaries if the contract between the parties contains conditions preventing the beneficiary from calling on the performance bond, which Mr Tyree calls a negative pledge, lie in the dicta of the High Court in Wood Hall Ltd v Pipeline Authority [1979] HCA 21; (1979) 141 CLR 443 (Wood Hall) where it was argued that the beneficiary was in breach of contract by calling on a bank guarantee. The High Court held that it was not. Stephen J, having referred to the appellant's first proposition that the Authority was in breach of contract against the contractor in making demands under the guarantee said at 459:
It is, then, the very nature of the performance guarantees which in their case renders unacceptable the contractor's first proposition. Had the construction contract itself contained some qualification upon the Authority's power to make a demand under a performance guarantee, the position might well have been different. In fact the contract is silent on the matter.
69 Two cases, one relied upon by CPB and one relied upon by JKC, show the different approaches taken by courts where a contract imposes some condition on calling on a performance bond. In Clough Engineering Ltd v Oil & Natural Gas Corp Ltd (2008) 249 ALR 458 (Clough Engineering), ONGC had the right under a construction contract to invoke performance guarantees '... in the event of the Contractor failing to honour any of the commitments entered into under this contract': [7]. In Lucas Stuart Pty Ltd v Hennes Hermitage Pty Ltd [2010] NSWCA 283 Hennes was entitled to call upon performance bonds if Lucas failed to comply with the terms of the notice given under a clause which provided that 'if the contractor has not materially complied with its obligations under this contract, the principal may give a written notice to the contractor stating ...': [20]. In both cases an issue arose whether the beneficiary may draw on the performance bond in the event of a dispute, that is, where the parties disagree about whether the condition for drawing on the bonds has been met and, if so, is a genuine belief on the part of the beneficiary sufficient or must the condition be objectively satisfied?
70 In Clough Engineering French, Jacobson and Graham JJ referred to the observation of Stephen J in Wood Hall that to introduce a qualification on the entitlement of the owner to call upon the performance guarantees would be to deprive them of the quality which gives them commercial currency. Their Honours then said at [77] that the authorities have recognised three principal exceptions to the rule that a court will not restrain payment under an unconditional obligation in a performance bond. The relevant exception is that if the beneficiary has made a contract promising not to call upon the bond, breach of that contractual promise may be restrained on normal principles relating to the enforcement by injunction of negative stipulations in contracts. Their Honours emphasised that the question will always be the proper construction of the contract. Their Honours set out a number of principles to be followed when considering whether the contract confers an unfettered right to call upon the performance bond. First, the importance of performance bonds in the construction industry, both nationally and internationally, is a factor which bears upon the question of construction of the contract: [81]. Secondly, the commercial background informs the construction of the contract and accordingly the court ought not to 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: [82]. Thirdly, 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, nonfraudulently: [83]. Fourthly, 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: [85]. This accords with the basic principle of construction that the terms of an instrument must be read as a whole. Therefore, the proper construction of the beneficiary's contractual entitlement to call on the performance guarantees must be informed by a consideration of the provisions of the prescribed performance guarantees: [85], [90]. Applying those principles the court held that the bank guarantees were not conditioned on any actual breach and entitled ONGC to call upon them notwithstanding the existence of a dispute between Clough and ONGC as to whether Clough had failed to honour any of its commitments under the contract.
71 In Lucas Stuart the contractor (Lucas) sought an injunction against the principal (Hennes) claiming the contract contained a negative stipulation not to call upon the performance guarantees other than in accordance with an express condition of the contract - cl 16. Clause 16 provided that the principal was entitled to call upon the performance guarantee if the contractor did not comply with a notice issued under subcl 16.2. Subclause 16.2 provided that the notice, which specified breaches alleged by the principal, could issue 'if the contractor has not materially complied with its obligations under this contract'. The Court of Appeal of New South Wales found that cl 16.2 requires a determination of whether the applicant has failed materially to comply with its obligations under the contract, with those obligations being looked at as a whole. An insignificant breach of a 'main obligation' would not satisfy a 'material noncompliance' entitling the principal to issue the notice. The court found that there was a serious question to be tried as to whether the defects referred to in the notice amounted to a material noncompliance with the contractor's obligations under the contract and granted the injunctions sought. Macfarlan JA, who delivered the leading judgment, noted that a contractual requirement on a contractor to provide an unconditional performance guarantee as security may be intended to achieve two principal goals. One is to provide security in the event of the insolvency of the contractor and the other is to enable the principal to obtain prompt payment of amounts it claims notwithstanding disputes raised by the contractor, that is a risk allocation device: [39] - [40]. His Honour said that not every contract seeks to achieve both goals and in that case only the first was sought to be achieved: [40]. His Honour reached that conclusion on the basis that the relevant clause in the contract only entitled the respondent to call upon the bonds if 'as a matter of objective fact, the applicant has not materially complied with its obligations': [41]. Macfarlan JA distinguished Clough Engineering on the basis that the proforma performance guarantee in Lucas Stuart did not contain any terms similar to those identified in Clough Engineering, that is statements to the effect that payment would be made without reservation or protest, that could qualify cl 16.2 in the same manner: [37]. However, Macfarlan JA nevertheless expressed reservations as to whether the contract in Clough Engineering, being 'expressed in terms of objective fact', could truly be said to have intended the performance guarantees in that case to be risk allocation devices: [43]. His Honour also questioned why in Clough Engineering the terms of the proforma performance guarantee were considered to affect the proper construction of the clause in establishing when the principal would be entitled to the guarantee: [43].
72 There is force in the observation of Tyree that the difference between the approaches of the courts in Clough Engineering and Lucas Stuart is one of how to consider the purpose for giving a demand guarantee. In Lucas Stuart, the court took as a starting point the existence of only the first purpose, looking for indications that might support the second. In Clough Engineering, the court, having regard to the nature of the unconditional undertaking, presumed that both purposes were intended unless expressly qualified.
73 CPB says that JKC's right to call on the Bank Guarantees under Article 35.3(a) is conditioned upon the objective fact that an amount is payable on demand. Senior counsel, Mr Thomson SC, said that Article 35.3(a) only allows for demand under the guarantee after it has been objectively determined by an arbitration that it is payable, that it has to be objectively the case that the amount is payable, that there needs to be an objective determination of the dispute that exists, it must be agreed that the amount is due and payable or it has to be determined by an arbitrator that it is due and payable, the amount must be objectively determined to be payable or where there is a bona fide dispute whether the amount is payable it is only objectively payable after it has been agreed or there has been a determination at an arbitration. Mr Thomson said that the amount must be actually or indisputably payable. I do not accept that interpretation.
74 Article 35.3(a) must be considered in its context. This requires that the Subcontract be read as a whole. The structure of the Subcontract is inconsistent with Contractor only having the right to demand payment of an amount under the Bank Guarantees if the amount is actually and indisputably payable. Article 35 is in ch V Financial Conditions of the Subcontract. Article 57 which deals with settlement of disputes is in ch IX.
75 Article 35.3(a) is part of Article 35. Article 35 provides that Subcontractor agrees to provide irrevocable guarantees 'payable on first demand of Contractor' to guarantee the due performance of Subcontractor's obligations under the Subcontract. A first demand guarantee is a guarantee that must be honoured by the guarantor upon the beneficiary's demand. The beneficiary is not required to first make a claim or take any action against the obligor of the guaranteed obligation that the guarantee supports. It would defeat the purpose of a first demand guarantee if the beneficiary (JKC) is required to establish by an arbitration award or court judgment or by some other means that the amount demanded is 'actually or indisputably' payable before it may make demand on the bank for payment.
76 Article 35.1(a)(iii) provides that the Bank Guarantee must contain an 'unconditional and irrevocable undertaking' by the bank to pay to Contractor the amount of the security on demand 'without notice being given to Subcontractor by the bank'. Annexure 1A contains a form of Bank Guarantee which is approved. The proforma form of Bank Guarantee provides that the bank or financial institution irrevocably and unconditionally undertakes to pay to the Contractor 'forthwith upon written demand from the Contractor any amount specified in such demand'. The bank's obligation to make payment 'shall arise on receipt of a demand without proof of any breach or any other conditions and notwithstanding any contest or dispute by the Subcontractor'. Thus, the parties agreed to the use of a 'first demand' guarantee. The parties know that the terms of the guarantee will oblige the bank to pay on demand. Both parties know that the bank's obligation is to pay despite any disputes between the parties. Furthermore, the Contractor is not required to notify the Subcontractor before making demand and the bank is neither required nor permitted to notify the Subcontractor prior to the satisfaction of the demand. The absence of notice provisions as to the existence of an amount being payable or of the intention to make demand as conditions precedent to any call on the Bank Guarantee indicates that Contractor's entitlement to call on the Bank Guarantees is not conditional upon it being established that the amount demanded is actually and indisputably payable.
77 Article 35.3(a) provides that Contractor may have recourse to the Bank Guarantees 'at any time'. That points against Contractor only being entitled to have recourse to the Bank Guarantees when the amount is actually or indisputably payable, that is it has been established by arbitration award or court judgment that the amount is payable. Further, Contractor may have recourse to the Bank Guarantees to recover the amounts that are payable by Subcontractor to Contractor 'on demand'. That also points against Contractor only being entitled to call on the Bonds when the amount is actually or indisputably payable.
78 Article 35.4(a) provides that if Contractor calls on a Bank Guarantee at any time, the balance of the proceeds (if any) after deducting amounts due and payable to Contractor by Subcontractor must be deposited by Contractor into an interest bearing bank account. That points against Contractor only being entitled to demand and receive payment under the Bank Guarantees when the amount payable has been determined by agreement, arbitration or court judgment.
79 As I have already observed, by Article 35 Subcontractor agrees to provide a Parent Company Guarantee to guarantee the due performance of Subcontractor's obligations under the Subcontract as well as Bank Guarantees. Article 35.2(a) provides that the Parent Company Guarantee must be provided by Leighton Holdings Ltd and must be in the form set out in Annexure 1B. The proforma Parent Company Guarantee provides, amongst other things, that the deed shall be a primary obligation of the Guarantor and the Contractor shall not be obliged before enforcing the deed to take any action in any court or arbitral proceedings against the Subcontractor. Thus, whilst by Article 35 Subcontractor agreed to provide Bank Guarantees 'payable on first demand of Contractor' and a Parent Company Guarantee, which was a primary obligation, to guarantee the due performance of Subcontractor's obligations under the Subcontract, CPB's construction of cl 35.3(a) would result in the Parent Company Guarantee but not the Bank Guarantee giving JKC the right to call on the security without establishing that the amount was actually and indisputably payable.
80 CPB submits that an indication that the Bank Guarantees is not a risk allocation device is that there is no provision for repayment if it is found later, upon arbitration, to have been wrongly called. Mr Thomson submitted that there is no provision for repayment because the parties did not contemplate payment under the Bank Guarantees as an interim process. JKC submits that the absence of any provision for recovery of money received under Bank Guarantees suggest that they are a risk allocation device and Subcontractor is left to its general law rights with respect to any recovery of funds to which it may be entitled after an arbitration award. In my view, the absence of a recovery provision is a neutral consideration. The absence of such a provision does not lead to the conclusion that the parties intended that a demand can only be made on the Bank Guarantees after it has been established by agreement, arbitration or court judgment that a specific amount is due and payable to Contractor. The absence of recovery provisions are equally consistent with the parties intending that in such an event Subcontractor is left to its general law remedies to recover from Contractor any amount demanded under the Bank Guarantees which it was later determined Contractor was not entitled to.
81 It is apparent from the text and structure of Article 35, in the context of the Subcontract as a whole including the proforma Bank Guarantee, that the purpose of the provisions relating to the Bank Guarantees is not only to protect JKC from the insolvency of CPB (providing security against insolvency) but also to ensure that JKC will have the funds during a dispute between the parties, that is it is an allocation of risk when there is a dispute (risk allocation device).
82 Upon its proper construction Article 35.3(a) does not contain an implied negative stipulation that JKC will not demand payment under the Bank Guarantees unless an amount is actually, objectively or indisputably payable by CPB to JKC. Such an implied negative stipulation would defeat the purpose of the Bank Guarantee provisions in the Subcontract.
83 CPB has not made out its case that on the proper construction of Article 35.3(a) JKC is only entitled to have recourse to the Bank Guarantees if an amount is actually, objectively or indisputably payable by CPB to JKC. CPB did not advance any alternative case. CPB did not argue that any demand by JKC under the Bonds to recover the amount of the liquidated damages demanded by JKC is fraudulent, unconscionable or not a bona fide demand. Indeed, it is hard to see how CPB could advance such a case when JKC has not made or threatened to make such a demand. It follows that CPB has not made out a prima facie case for an interlocutory injunction.
84 It is not necessary to consider the balance of convenience. However, if I had found that CPB had made out a prima facie case that JKC will breach an implied negative stipulation in Article 35.3(a) if and when it has recourse to the Bank Guarantees before it has been established that an amount is actually, objectively or indisputably payable by CPB to JKC I would refuse to grant an injunction restraining JKC calling on the Bank Guarantees because the balance of convenience favours the refusal of an interlocutory injunction. The Bank Guarantees are a risk allocation device. CPB agreed to provide to JKC unconditional irrevocable bank guarantees payable on first demand without notice to CPB. The purpose of the Bank Guarantees, and the provisions in the Subcontract relating to them, would be defeated if JKC is restrained from calling on the Bank Guarantees until the dispute concerning extensions of time and liquidated damages has been resolved by arbitration.
(1935) 53 CLR 643
(1968) 118 CLR 618
(1979) 141 CLR 443
(2008) 249 ALR 458
(2010) 27 VR 22
(2006) 227 CLR 57