CPB CONTRACTORS PTY LTD -v- JKC AUSTRALIA LNG PTY LTD [2017] WASC 112 (20 April 2017)

CPB CONTRACTORS PTY LTD -v- JKC AUSTRALIA LNG PTY LTD [2017] WASC 112 (20 April 2017) - WASC 2017 case summary — Zoe

[81]

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.

[88]

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.

[89]

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].

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