Fluor Daniel Pty Ltd v Anaconda Operations Pty Ltd

2. The plaintiff seeks an interlocutory injunction against the defendants to restrain the defendants from disposing of moneys alleged to be held as security pursuant to an agreement between the plaintiff and the first defendant. In essence, the context of the injunction application is a building dispute between the plaintiff and the first defendant. Pursuant to a building contract between those parties the first defendant held bank guarantees in the sum of over $45M with the Westpac Banking Corporation as security for defects and disputes arising under or in relation to the building contract. The first defendant has called up the security and the plaintiff disputes the first defendant's entitlement to the same. Consequently, the plaintiff sought an injunction restraining use of the security sum pending trial.

5. The matter first came before me in the Practice Court on 22 September 1999 when I heard an urgent application ex parte without notice by the plaintiff. The application was heard outside normal court sitting hours. The effect of the order made on 22 September 1999 was to restrain the first defendant from disposing of or dealing with the moneys held on security. The further hearing of the application was adjourned to 23 September 1999. On 23 September 1999 orders were made by consent extending the injunction granted on 22 September until 30 September 1999. Subsequently, the parties realised that the plaintiff's summons ought to have been adjourned on 23 September until 30 September 1999 but such order had been overlooked by the parties. As a consequence, the court on its own motion on 24 September 1999 adjourned the plaintiff's summons to 30 September 1999.

8. On 30 September 1999 the hearing of the application for an interlocutory injunction proceeded on an inter parties basis in the Practice Court, the hearing occupying the entire day. I reserved my judgment. On 5 October 1999 I granted the interlocutory injunction and provided short indicative reasons due to the apparent urgency of the matter. On 6 October 1999 the parties returned before me and submitted a minute of agreed form of order and which order was made accordingly on that day. My indicative reasons were available to the parties from 8 October onwards. Nothing further was heard from the parties until the court was informed late on 19 October 1999 of a pending application before the Court of Appeal on 22 October 1999. The parties did not notify the court of the application to the Court of Appeal earlier. In any event, the following reasons constitute my formal reasons for the orders made on 5 October 1999.

11. The dispute between the plaintiff and the defendant relates to a building contract dated 21 August 1997 whereby the defendant agreed to pay the plaintiff the sum of $800,926,568 for the design, construction and pre-commission of a nickel and cobalt facility in Western Australia ("the contract"). As part of the contractual arrangements between the plaintiff and the defendant there were a number of collateral agreements related to the construction and commissioning of the facility ("the project"). One such agreement was a procurement and construction management agreement ("the management agreement") whereby the plaintiff undertook to manage certain contractors engaged by the defendant to perform certain works on the project site. As part of the management agreement, the defendant had the option to convert that agreement into a global contract. The defendant exercised the option under the management agreement and, as a consequence, the parties entered into the contract dated 21 August 1997.

14. In addition, the plaintiff and the defendant entered into a commissioning and ramp up agreement on 21 August 1997 ("the ramp up agreement"). Under the latter agreement the defendant agreed to pay the plaintiff a fee calculated under the terms of that agreement and the plaintiff was to provide the defendant with assistance in carrying out commissioning and production ramp up of a nickel and cobalt facility upon completion of the contract dated 21 August 1997.

17. The works to be performed under the contract consisted of two portions described as "Separable Portion 1" and "Separable Portion 2". Separable Portion 1 was concerned with a mixed sulphide plant. Under the contract the date for mechanical completion of Portion 1 was 30 September 1998.

"4 Security 4.1 Form The Contractor must provide in lieu of a cash retention on progress payments, security to the Owner in respect of the Contractor's obligations under this Contract in the form set out in Schedule 3 prior to each payment pursuant to Clause 12 and as a condition precedent to the Owner's obligations to make such payment in an amount of 10% of such progress payment until the total value of all such security held by the Owner is equal to 5% of the Contract Price. 4.2 Release The Owner must reduce the Approved Security provided under Clause 4.1 to the Contractor as follows:

(a) within 14 days of the Date of Mechanical Completion of all Separable Portions, the Owner will reduce the retention held or the Approved Security by 40%; and

(b) within 14 days after the end of the Defects Liability Period of all Separable Portions (not including any extension as contemplated by Clause 9.8) the Owner will return the retention held or the Approved Security except for a percentage of the retention or Approved Security which corresponds to that proportion of the Contract Price represented by the items subject to an extension of the Defects Liability Period; and

(c) the retention held or the Approved Security will be reduced proportionally as the items subject to an extension of the Defects Liabilty Period reduces; and

(d) the balance of the retention held or the Approved Security will be returned to the Contractor when the last of the following occurs:

(i) the last Defects Liability Period has expired; and

(ii) the Contractor has complied with all its obligations under the Contract.

(a) The Owner is not obliged to pay the Contractor interest on the Approved Security.

(b) The Owner does not hold any Approved Security or the proceeds of any Approved Security on trust for the Contractor.

(c) The Contractor accepts that the Owner may call upon the Approved Security at any time and the Contract shall not seek an injunction against either the Owner or the issuer of the Approved Security preventing a demand on payment under such security.

(d) If the Owner makes a call upon the Approved Security and obtains cash as a consequences, the Owner shall be obliged to pay interest on the amount of any cash payments in excess of the sum to which the Owner is entitled at the time of such call. The sum attracting interest will be further reduced by any unsatisfied amounts which subsequently become payable by the Contractor to the Owner, at the time such amounts became payable."

36. Clause 4.1 of the contract required the plaintiff to provide, in lieu of a cash retention on progress payments, security in respect of the plaintiff's obligations under the contract. The plaintiff also procured a guarantee and indemnity from its parent company in the United States, Fluor Corporation. In accordance with its obligations under the security provisions of the contract the plaintiff provided bank guarantees ultimately in the amount of $45M. On about 1 September 1998 the plaintiff requested two performance undertakings from the Westpac Banking Corporation. The first undertaking was dated 31 August 1998 in favour of the first defendant to a maximum aggregate sum of $18M expiring on 31 December 1998. The second undertaking dated 31 August 1998 was also in favour of the first defendant to a maximum aggregate sum of $27M expiring on 31 December 1999. The two performance undertakings totalled $45M or 5% of the price under the contract and were to be provided to the first defendant by the plaintiff in exchange for the initial security and in order to facilitate the release of the security in accordance with clause 4 of the contract. At the request of the first defendant the plaintiff on 26 November 1998 provided further substitute security to the first defendant in the form of two performance undertakings from Westpac Banking Corporation. The first undertaking dated 26 November 1998 was given in favour of the defendant in the sum of $18,060,000.00 to expire on 15 March 1999. The second undertaking given on 26 November 1998 in favour of the defendant was for the sum of $27,090,000.00 and to expire on 15 March 2000. The latter undertakings are hereafter referred to as the "approved security". Subsequently, the first component of the approved security in the sum of $18,060,000.00 was extended to 31 December 1999.

39. On 21 September 1999 the defendants called upon the approved security. The plaintiff was informed by the Westpac Banking Corporation that the defendants received from the bank a bank cheque in the sum of $45,150,000.00 being the total value of the approved security at approximately 3.15 pm on that day. As a consequence, the plaintiff sought an interlocutory injunction ex parte without notice on 22 September 1999 to preserve the moneys and interim orders were made in order to preserve the status quo pending the hearing of the application for the interlocutory injunction.

42. The position of the plaintiff is that it claims that the moneys that constitute the approved security were held in respect of the performance of the obligations of the plaintiff under the contract. The plaintiff alleges that the defendants are not entitled to apply the security for any other purpose without an express contractual provision entitling them to do so. Further, the plaintiff alleges that the defendants are not entitled to apply the approved security moneys to meet any costs or liabilities arising outside the contract. On the other hand, the defendants allege that the moneys constituting the approved security are moneys that are their own and which they are entitled to apply to meet such purposes as they consider appropriate including operating shortfalls and other claims that the plaintiff alleges fall outside the contract.

45. The dispute between the plaintiff and the defendant for the purposes of the hearing of the interlocutory injunction application revolved around the status of the works on the project.

48. The plaintiff commenced providing services in relation to the project in about June 1996 and through its proper officers has deposed on affidavit that the plaintiff remains on site performing works pursuant to its obligations under the contract. In particular, the plaintiff relied upon the affidavits of Richard Hugh McDonald, both sworn 22 September 1999 and the affidavit of William Norman Shaw sworn 29 September 1999. In summary, Mr McDonald in his affidavits deposed that mechanical completion has been completed of Separable Portions 1 and 2 under the contract and that the defendant accepted the hand over of all of the parts making up Separable Portion 1 during the period from 13 August 1998 and 2 June 1999. It is asserted by the plaintiff that it applied for a notice of mechanical completion of Separable Portion 1 on 15 September 1999. In a letter dated 21 September 1999 the defendant wrote to the plaintiff making claims against the plaintiff allegedly in relation to the project totalling $142.900M. Mr McDonald in his affidavits deposed on behalf of the plaintiff that included in the amount claimed by the defendant totalling $142.9M there was a claim for $75M and which the plaintiff alleges did not arise from the contract but for the loss of benefit under an insurance policy. Further, the plaintiff alleges that the balance of the sum claimed being $53.3M relates to the top entry system which the plaintiff alleges was not required under the contract. The dispute over the top entry system forms a major component of the dispute between the parties.

51. The defects alleged by the defendant against the plaintiff in relation to the project fall into a number of categories. Firstly, the rectification of flash vessels. Essentially the dispute between the plaintiff and the defendants revolves around the provision for entry into flash vessels. The plaintiff alleges that the design that formed part of the terms of the contract made provision for a bottom entry system. The defendant disputes the method of entry and alleges that the bottom entry system was inadequate and unsuitable for the defendants' purposes. Accordingly, it is alleged by the defendants that a conversion by them to top entry at their cost arises from the defect in construction by the plaintiff of a bottom entry system. Furthermore, and relevantly, there is a dispute between the plaintiff and the defendants as to whether or not the bottom entry system designed and installed by the plaintiff has worked. The plaintiff appears to concede that there were some initial difficulties upon commissioning but asserts that such difficulties were not surprising in light of the complexity of the project. The plaintiff asserts that at the time when it was endeavouring to attend to the bottom entry system the defendants unilaterally determined to convert the flash vessels from bottom entry to top entry.

54. In addition, there is other work alleged by the defendants to be defective described as "backcharge items". There are alleged defects also alleged in the facility said by the defendant to require rectification by the plaintiff concerned with a mill discharge screen, decantation, corrosion, pressure vessels known as "autoclaves", relief valves, the venting system, slurry storage, couplings used to join pipe and the acid plant.

57. In summary, Mr McDonald in his affidavit sworn 22 September 1999 responded to the claim by the defendant for the total amount of $142.9M as follows:

"(a) Item 1: Rectification of Flash Vessels $53.3 million. This relates to work which falls outside the Plaintiff's contractual obligations which Anaconda chose to undertake itself after handover of the relevant plant. (b) Other defective work: $7.6 million. This relates to work which Anaconda unilaterally chose to do over the past nine months approximately, to the exclusion of the Plaintiff who was ready willing and able to perform its obligation under the Contract to rectify any defects. (c) Other outstanding defects: Estimated $7 million. To the extent these items constitute defects under the contract the Plaintiff is in the process of rectifying them. (d) Loss of the benefit of the extended liquidated damages insurance policy: This is an extra contractual claim not a contractual claim against the Plaintiff. (e) Delay re bottom entry. This is a non contractual claim about the adoption of bottom entry design in the contract. (f) Other defects: This foreshadows other misrepresentation claims and duplicates Item (c) above. (g) Misleading and deceptive conduct: This is an extra contractual claim."

61. It is apparent from the letter sent by the defendants dated 21 September 1999 to the plaintiff that there are extensive disputes between the plaintiff and the defendants concerning completion of the project. Further, it is apparent from the defendants' letter and the matters deposed to by Mr McDonald in his larger affidavit of 22 September 1999 that there are disputes between the plaintiff and the defendants as to whether the moneys claimed by the defendants fall properly within the ambit of the plaintiff's obligations under the contract or outside the contract. Necessarily, the determination of whether the claims by the defendants fall within or without the contract relate to the entitlement of the defendants to call upon the security moneys provided by the plaintiff under the approved security pursuant to Clause 4 of the contract.

64. Mr Shaw is the project director for the plaintiff in relation to the contract and he has set out in an affidavit the perspective of the plaintiff that it has discharged and is continuing to discharge all of its obligations under the contract. Mr Shaw asserts, further, that the defects claimed by the defendants have been rectified, are in the process of being rectified or are the subject of an instruction from the defendant not to proceed for the present with rectification work.

67. The defendants filed an affidavit sworn by David John Lohman on 28 September 1999 he being the project manager of the first defendant. In substance, Mr Lohman attempted in his affidavit to respond to the claims of the plaintiff, particularly those set out in the affidavits of Mr McDonald concerning alleged defects and the attempts by the plaintiff to rectify such defects, if any. It is not necessary for me to determine whether the correct position is that deposed to by Mr McDonald or that deposed to by Mr Lohman. Indeed, it would be inappropriate for me to do so. Rather, the two sets of affidavits sworn by Mr McDonald and Mr Lohman demonstrate that there is a serious issue to be tried between the plaintiff and the defendants with respect to the alleged defects relating to the construction by the plaintiff of the project and, further, whether the defects arise within or outside the contract. It follows that there is a further serious question to be tried as to whether the moneys that form part of the approved security constitute moneys that the defendants are entitled to call upon.

70. Mr B. Walker SC who appeared with Mr Waller for the defendants submitted that there was no serious question to be tried as to whether the first defendant was entitled to call upon the approved security under the contract. He submitted that the terms of the contract were clear and that Clause 4.3(c) of the contract expressly authorised the first defendant "to call upon the Approved Security at any time". Mr Walker put the position for the defendants on the basis that Clause 4 of the contract did not impose an express restriction on the right of the first defendant to call upon the security at any time and, in particular, relied upon the observations of the High Court in Wood Hall Limited v The Pipeline Authority [1979] HCA 21; (1979) 141 CLR 443. Further, it was argued by Mr Walker that a term will not be implied into a contract if it contradicts an express term. He relied upon the observations of the High Court in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266, 283 and Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337, 347, 404. Mr Walker submitted that a term restricting or limiting the right of the first defendant to call upon the approved security as asserted by the plaintiff would be inconsistent with the provisions of Clause 4.3(c) of the contract and, on the basis of the authorities, contradicted an express term of the contract.

73. In my view the statements of principle as to the law governing contracts submitted on behalf of the defendants are correct. However, the proper construction of the contract itself, in particular, Clause 4 on its face supports the position urged on behalf of the plaintiff, namely, that the defendants were only entitled to call upon the approved security with respect to matters arising under or within the contract. It is in any event for the purposes of the present exercise a matter that is arguable and in my view constitutes a serious question to be tried. The ultimate determination of the correct construction of Clause 4, in particular Clause 4.3(c) of the contract is a matter to be determined at trial.

76. It was further argued by Mr Walker that the nature of the injunction sought by the plaintiff against the defendants constituted an order in the nature of a mareva injunction or as more recently described by the High Court, a mareva order. Mr Walker relied upon the principles expressed by the High Court in Cardile v LED Builders Pty Ltd [1999] HCA 18; (1999) 73 ALJR 657 to the effect that a mareva order because of its drastic effect is only appropriate where a party uses the assets of another or where a process is available so that the party can be obliged to disgorge the relevant funds or property. He submitted that the moneys constituting the approved security were the defendants' and repeatedly referred to the moneys as "our money". Mr Walker submitted that the defendants are entitled to make use of assets lawfully acquired as they consider appropriate. However, I am satisfied that the disputed moneys only became or become "their money" when the defendants' entitlement to the moneys crystallises under the contract. The plaintiff in effect says the entitlement has not crystallised, the defendant says it has. Until this issue is determined at trial the proper characterisation of the injunctive order as a mareva order cannot be made in any event. I am satisfied on the affidavits filed both in support and in opposition to the granting of the injunction that the very question of whether the disputed moneys are the defendants' moneys poses a serious question to be tried. An inherent part of such determination is the very construction of Clause 4 of the contract itself. I have already expressed the view that the proper construction of Clause 4 constitutes of itself a serious question to be tried. It follows, accordingly, that the application of the approved security provided under Clause 4 of the contract is a serious question to be tried after the construction of Clause 4 has been determined at trial.

79. The entitlement of a party to call up security provided under a building contract has been considered by the courts on many occasions. Mr N. Young QC who appeared with Mr J. Foxcroft for the plaintiff relied upon the observations of the High Court in Australasian Conference Association Limited v Mainline Constructions Pty Ltd [1978] HCA 45; (1978) 141 CLR 335 and the more recent observations of the Court of Appeal in Fletcher Construction Australia Limited v Varnsdorf Pty Ltd (1998) 3 VR 812 and Backman v BHP [1998] VSCA 40; (1999) 1 VR 420. These authorities were essentially relied upon by Mr Young to support the proposition that the first defendant was only entitled to access the moneys constituting the approved security strictly pursuant to the terms of the contract and that the defendants were not entitled to treat such moneys as "their moneys". Ultimately the matter turns upon the proper construction of Clause 4 of the contract and, also, determination of the disputes between the plaintiff and the defendants with respect to alleged defects. These are matters that ought properly be determined at trial. I need only be satisfied that there is a serious question to be tried and for the reasons already indicated I have formed such view.

82. Further, on the basis of the matters deposed to in the affidavits filed on behalf of both parties I am satisfied that there are a number of serious questions to be tried. I list these matters as follows:

1. The proper application of the security monies under the contract; 2. Whether the defendant is entitled to treat the relevant monies as "its money" under the provisions of the contract; 3. Whether there are any remaining works under the contract and, if so, whether the plaintiff is entitled to perform those works or whether the defendant is entitled to perform the works itself and in the process apply the disputed monies to that purpose; 4. Whether lower entry or upper entry systems were part of the design for the purposes of the contract; 5. Whether bottom entry would have been effective for the purposes of the defendant's operation; 6. Whether the defendant was entitled to act unilaterally; 7. Whether the defendant has acted outside the contract and incurred costs that are not part of the contractual obligations of the plaintiff; 8. Whether mechanical completion has occurred.

86. I turn to consider the issue of where the balance of convenience lies. It was submitted by Mr Walker on behalf of the defendants that the contract contemplated that the first defendant was to have an unconditional bank undertaking in its favour. He submitted that if it was subsequently determined that at the time of making the call upon the undertaking that the first defendant was not entitled to some or all of the moneys received pursuant to the approved security the first defendant was obliged to re-pay those moneys together with interest pursuant to Clause 4.3(d) of the contract. Mr Walker submitted that the terms of Clause 4 of the contract contemplated the existence of a potential dispute as to the entitlement of the first defendant to the approved security. He submitted that such recognition was borne out by the terms of the contract itself and that Clause 4 did not constitute or provide a prohibition on the first defendant converting the security into cash. He submitted, further, that the affidavits filed by the defendants of Messrs James and Muller sworn on 27 and 29 September 1999 respectively established that the first defendant is capable of reimbursing any moneys that it has called upon pursuant to the approved security that might subsequently be determined as moneys to which it was not entitled.

89. There are a number of factors that weigh against the acceptance of such submissions. Firstly, the matters deposed to by Mr McDonald in his larger affidavit sworn 22 September 1999 which reveal that the first defendant has a paid up capital of $100. Its sole asset is the facility in Western Australia that constitutes the project. Secondly, documents were produced by the defendants after the service upon them by the plaintiff of a subpoena. As a result, documents were tendered by Mr Young on behalf of the plaintiff (being described as "Bundle of correspondence of Anaconda to Murrin Murrin re $45M deposit"). The documents demonstrated that the first defendant and its joint venturers in the project are devoid of funds and, further, that the first defendant has debts that cannot be serviced. Thirdly, on the basis of the documents tendered by Mr Young on behalf of the plaintiff I am satisfied that there is a risk of the moneys that are the subject of the approved security being sent overseas, dissipated and put beyond reach of the plaintiff. It follows, further, that even if the plaintiff succeeded in an order for damages against the defendants there is a substantial risk that such an order for damages would remain unsatisfied because of the financial position of the defendants and the risk of the movement of the relevant funds offshore.

92. Accordingly, for these reasons and the reasons indicated on 5 October 1999 I find that the plaintiff's application for an interlocutory injunction is made out.