The Main Facts over the Period from May 2014 to April 2016
22 Mr Young described the operations of the applicant and the Sino Iron project in the following terms.
23 The applicant is a wholly owned subsidiary of E & A Limited (E & A) which is a publicly listed company. The company is a mechanical fabrication and installation company which provides specialised services to the oil and gas, mining, defence and water industries. It operates a number of fabrication workshops and the services it provides includes the fabrication of pipe spooling, pressure vessels, welding of all material grades, modular skid construction, machinery and material handling manufacture, light to heavy general steel and plate construction. The applicant has performed a number of site based construction projects throughout Australia. The following are examples: the fabrication of in excess of 36 km of carbon steel pipe spooling on the Western Mining Corporation/BHP Billiton Olympic Dam expansion; the fabrication of pipe spools for the Ravensthorpe Nickel project on behalf of AKER Kvaerner/Chemetics which included the fabrication of 800 tonne of spooling from a variety of materials; the fabrication and supply and erection of approximately 400 tonne of structural steel on platforms; and the fabrication and installation of carbon steel and stainless steel pipework at the Uranium One project north west of Broken Hill; and with respect to the Sino Iron project (described below) which involved a 450 MW Combined Cycle power plant operated by CITIC Pacific Mining Ltd (now known as CITIC Ltd) (CITIC), the applicant was one of the main subcontractors to CITIC and it installed turbines, boilers, stacks, fans, steelwork structures, piping, pumps and associated equipment.
24 CITIC developed the Sino Iron project at Cape Preston. Cape Preston is 100 km south west of Karratha in Western Australia's Pilbara Region and 14,090 km north of Perth. The project is the largest magnetite mining and processing operation in Australia. The operation has been designed with sufficient capacity to produce millions of tonnes per annum of final magnetite concentrate over a production life of 25 years.
25 CITIC is incorporated in Hong Kong and is listed on the Hong Kong stock exchange. CITIC Pacific Mining Management Pty Ltd (CPM) and Sino Iron Pty Ltd (Sino Iron) are subsidiaries of the company. There are two dewatering buildings known as Dewatering Buildings 313 and 314 at a distance of approximately 25 km from the Sino Iron project mine site. The dewatering buildings are located in the concentrator area and their purpose is to dewater the concentrated magnetite from the slurry pumped from the concentrator prior to barging the extracted magnetite ore to ships for export.
26 On 20 May 2014, Mr Chapman met with Mr Tim Symonds and Mr Don Patterson. Mr Symonds introduced Mr Patterson as being from BCMC. In subsequent correspondence, Mr Patterson is described as the business manager of BCMC. There was a discussion at the meeting about a new potential project. Mr Chapman could not recall whether Mr Millen was at the meeting. After the meeting, Mr Chapman asked Mr Patterson to provide further information to the respondent which in due course Mr Patterson did. Mr Chapman said that the matters being discussed at that time were the prospect of the respondent providing bank guarantees, working capital and asset finance facilities.
27 On 17 June 2014, Mr Chapman met with Mr Patterson and Mr Millen at a café and had further discussions about a future relationship between the respondent and BCMC.
28 On 8 July 2014, BCMC entered into a contract with Sino Iron for the installation and commissioning of mechanical equipment and piping associated with Dewatering Buildings 313 and 314 (the Head Contract). The contract stated that it included two separable portions of work which were described as follows:
(1) Mechanical and Piping Installation and Commissioning Works related to Dewatering Buildings 313 and 314 (Separable Portion of Works #1);
(2) Repair of Damaged Belt Conveyors and modification works in relation to Separable Portion of Works #1 (Separable Portion of Works #2).
The contract sum was AUD22,698,000.
29 It was a condition of the Head Contract that BCMC provide two performance guarantees for 10% of the contract sum with one to be released within seven business days of the date of practical completion and the other to be released within seven business days of the expiration of the defects liability period. In September 2014, the respondent, at the request of BCMC, issued two performance guarantees in favour of Sino Iron. These guarantees were secured by term deposits held by the respondent.
30 BCMC approached the applicant and asked it to submit a tender to perform the scope of works in the Head Contract. In addition, BCMC asked the applicant to submit a proposal for the supply of labour only for the variation works being carried out in the project. BCMC provided the applicant with all of the tender documentation provided to it by CPM on behalf of Sino Iron.
31 By letter dated 11 July 2014, the applicant submitted a proposal to BCMC for "the supply of labour, plant and equipment for the mechanical installation as detailed within the documentation provided being for the Dewatering buildings 313 & 314". The price offered by the applicant was $17,350,000 (excluding GST). The proposal also included a request by the applicant for an upfront or advance payment of 15% on the signing of the contract and payable within seven days from the receipt of a supporting bank guarantee. The payment terms under the applicant's proposal were that progressive invoices were to be rendered based on the percentage completion of the project each month, including material received in the workshop and on the site. Invoices were to be paid within 30 days.
32 On 31 July 2014, Mr Patterson, on behalf of BCMC, made an application to the respondent for a credit card facility.
33 It is appropriate to refer at this point to the practice of the respondent upon receiving a finance or credit application to the extent that it is relevant to this case. It seems that the application would be made by letter or email, or perhaps orally. A bank officer would prepare a document which was called a credit submission. The credit submission would contain details of the customer, the facility sought, the security offered or sought and the decision on the application and, to varying degrees depending on the nature of the application, the reasons for the decision. If the application was approved, then the customer would be advised by letter and, relevant to this case, sent a Business Finance Agreement for execution. Subsequent credit submissions for new facilities for the same customer would often contain information about the customer and existing facilities taken from earlier credit submissions.
34 A number of credit submissions relating to applications by BCMC over the period from May 2014 to April 2016 were put in evidence, but I will refer only to those that are directly relevant.
35 I return to BCMC's application for a credit card facility. In a section in the credit submission titled, "Relevant Recent Events", the following appeared:
August 2014
Bluenergy CMC (previously A/C held with the WBC Victoria Park Branch), Troy Millen & related entities (previously managed by WBC Kewdale BBC) was transferred to this connection to support a banking relationship for Bluenergy CMC related activities.
RM Jarrod Smith advised that a number of adverse account behaviours were evident in the previous banking relationship out of the Kewdale BBC. Issues have been rectified and the Director Troy Millen advises that the adversity mostly relates to his previous business partners banking activities and issues have now been resolved. The Director assures going forward that he will manage the banking relationship to ensure for future adversities are faced in the current banking arrangements.
36 The application for the credit card facility was approved by the respondent and the facility was made available to BCMC on 22 August 2014. The offer in respect of that facility was made by way of a Business Finance Agreement dated 25 August 2014.
37 On 7 August 2014, Mr Patterson sent an email to Mr Chapman about the Sino Iron project. He identified the applicant as the subcontractor. There was a reference to bank guarantees being provided by the applicant to BCMC and by BCMC to Sino Iron.
38 On 21 August 2014, the applicant entered into a contract with BCMC to perform the works which were described, by way of a "High level description of the Works", as follows:
The Works shall include but are not limited to installation and commissioning of mechanical equipment and piping associated with Dewatering Buildings 313 and 314, install of all free-issued and Contractor supplied equipment, piping, in-line valves, in-line instruments, various supports, brackets, etc., as further detailed in Schedule 1 (Scope of Work) and Schedule (Specifications)
(the Subcontract.)
39 As one of the witnesses put it, the Head Contract and the Subcontract were essentially "back to back" contracts. The applicant was to do the bulk of the work. BCMC was to perform some supervision and engineering services.
40 The applicant and BCMC did reach an agreement about an upfront or advance payment by BCMC to the applicant, but it was not included in the Subcontract. It was a side agreement negotiated between Mr Young and Mr Millen. Mr Young believed that Mr Millen was the managing director of BCMC. The circumstances surrounding the making of the agreement were as follows.
41 I have already referred to a request for an upfront or advance payment in the applicant's proposal dated 11 July 2014. On 7 August 2014, Mr Millen sent an email to Mr Brian Tidswell, chief executive officer of the applicant, suggesting an advance payment of 10% of the contract price under the Subcontract. The email was followed by further emails which passed between Mr Alaraj and Mr Patterson.
42 On the weekend of 16 August 2014, Mr Young met Mr Millen in Adelaide and they agreed that BCMC would make an advance payment to the applicant of 10% of the contract price under the Subcontract, namely, an amount of $1,735,000 (including GST). It was agreed that the advance payment would be made prior to commencement. It was agreed that each month when the applicant rendered an invoice to BCMC, the latter would retain 10% of the amount paid under the invoice for the purpose of reducing the outstanding balance of the advance payment. It was agreed that the applicant would provide BCMC with a bank guarantee in the amount of $1,735,000 in support of completing the works so as to ensure repayment of the advance payment. A bank guarantee for a lesser sum would be exchanged from time to time to recognise the reduced value of the advance and in order to free up the applicant's banking facilities. I will refer to this agreement as the Advance Payment Agreement.
43 Mr Young said, and I accept, that BCMC agreed to make the advance payment to the applicant to enable the applicant to mobilise to a relatively remote project site in preparation for the performance of the scope of works under the Subcontract. The advance payment was to be progressively repaid by the applicant by mobilising and completing the scope of works. Mr Young said that he also sought the advance payment because he had previously found Sino Iron "a very slow payer and very difficult". Mr Young said that the bank guarantee was to support the applicant's obligations to complete the scope of works so as to repay the advance payment. I accept that that was the applicant's understanding of the arrangement.
44 On 25 August 2014, the applicant mobilised to the site. This was before the advance payment was made by BCMC to the applicant.
45 BCMC had to borrow the funds which it needed to make the advance payment from the respondent. It applied to the respondent for a Bank Bill Business Line in the amount of $1,735,000. I will refer to this as the Bill Facility.
46 The respondent approved the Bill Facility and an offer was made to BCMC on 18 September 2014. The offer was accepted and Ms O'Brien, who was the director of BCMC, executed a Business Finance Agreement for the Bill Facility on 25 September 2014.
47 It is necessary to refer to a number of matters concerning the granting of the Bill Facility.
48 On or about 27 August 2014, the applicant agreed with BCMC that it would pay 50% of the costs associated with the Bill Facility.
49 On or about 1 September 2014, Mr Patterson sent an email to Mr Chapman with a copy to Mr Millen, which included the following statement:
During the week we will receive from our primary subcontractor one Bank Guarantee in favour of the Westpac bank. This is to support borrowings on our part of $1,735,000 to be made available as a prepayment to the primary Subcontractor. The loan will be repaid out of the last primary subcontractor Progress Claim, in approximately 12 month's time.
50 In early September 2014, there were negotiations concerning the proposed wording and terms of the Guarantee to be provided by the applicant. I will deal with these negotiations separately below.
51 The credit submission for the approval of the Bill Facility reveals the following matters about the parties, the terms of the Facility and the respondent's knowledge of the purpose of the Facility.
52 First, BCMC is a national construction company and one would reasonably infer from the statements in the credit submission, the major operating company.
53 Secondly, the respondent was advised that the applicant was:
only agreeing to provide an undertaking in favour of Westpac Banking Corporation to only secure the BBBL facility for $1,735.
54 Thirdly, the respondent was advised that the purpose of the debt funding was to make a prepayment to the applicant. The Facility was interest only and to be repaid in 12 months (i.e., 1 October 2015). The respondent was told that the Facility would be repaid from "the projects last progress claim from the primary subcontractor in approximately 12 month's time".
55 Fourthly, the respondent was told that to mitigate the lump sum risk of the project, BCMC engaged the applicant, a subsidiary of the publicly listed entity, E & A, "to carry the burden of the project works while Bluenergy undertake the management/supervisory role".
56 Fifthly, the credit submission contains the following passage:
- The bank guarantee securing the above facilities are advanced from National Australia Bank on behalf of Ottoway Engineering Pty Ltd. Ottoway is providing a guarantee for work that they are involved in on the Sino Iron project. Legal advice for Ottoway Engineering Pty Ltd is proposed for this transaction to provide them with a legal opinion and contractual obligations they are committing to by providing a guarantee to secure facilities with Westpac Banking Corporation.
Although this statement appeared in the credit submission, the matter was not pursued by the respondent because, as I understand Mr Chapman's evidence which I accept, it was not necessary to do so because it was NAB which was providing the guarantee. Mr Chapman said that this was not a comment which he included in the submission, nor did he instruct Mr Ekanayake to do so. Mr Chapman said that he did not consider it necessary to speak to the applicant about the fact that it would be procuring the issue of a bank guarantee in favour of the respondent to secure BCMC's obligation to the respondent as the applicant was part of a publicly listed group and it could look after its own interests. Furthermore, it was a matter for the applicant and its banker, NAB, whether a bank guarantee would be issued. He spoke to Mr Ekanayake about these issues. He cannot recall if he spoke to anyone from the respondent's credit team in relation to these issues.
57 Finally, there is a statement in the credit submission that the Agreement panel in the guarantee is to clearly state that the issued undertaking is to secure the lending obligations of BCMC to the respondent.
58 The Business Finance Agreement for the Bill Facility referred to the security provided in relation to the Bill Facility. The bank guarantee was described as follows:
Irrevocable Standby Letter of Credit from National Australia Bank Limited ABN 12 004 044 937 for the amount of 1,735,000.00 on behalf of Ottoway Engineering Pty Ltd ACN 125 531 428 to secure the lending obligations of Bluenergy CMC Pty Ltd ACN: 160 063 187 to Westpac Banking Corporation ABN 33 007 457 141.
59 The security for the Bill Facility also included certain term deposits lodged with the respondent by BCMC and a Guarantee and Indemnity to be given by Mr Millen and Ms O'Brien.
60 As I have said, there were negotiations about the proposed wording and terms of the earlier guarantee. It is necessary to set out the details because one of the applicant's submissions is that BCMC was the respondent's agent for the purposes of the negotiations. I deal with the agency argument below (at [179]).
61 It is convenient to start with the definition of the "Agreement" in the earlier guarantee as executed. It was as follows:
PROJECT MOBILIZATION COST PLANT, EQUIPMENT'S AND RECOURSE FOR CONTRACT BETWEEN OTTOWAY ENGINEERING PTY LTD ABN 70 125 531 428 AND BLUENERGY CMC PTY LTD ABN 33 160 063 187 EXECUTED ON THE 21ST OF AUGUST 2014 FOR THE PROVISION OF MECHANICAL & PIPING INSTALLATION & COMMISSIONING WORKS RELATING TO DEWATERING BUILDINGS 313 AND 314 CONVEYOR REPAIRS. THIS BANK GUARANTEE ISSUED TO SECURE THE LENDING OBLIGATIONS OF BLUENERGY CMC PTY LTD TO WESTPAC BANKING CORPORATION
62 The negotiations about the proposed wording and terms of the earlier guarantee were as follows.
63 On 5 September 2014, Mr Alaraj sent an email to Mr Patterson in the following terms:
I have attached the format and the wording of the NAB BG.
Ottoway will issue a conditional BG's with an expiry date of 30 July 2015.
Agreement:
Refer to contract number BCA3-ME-WC-3256 between Ottoway Engineering and Bluenergy CMC Pty Ltd.
The advance payment will be against project mobilization cost plant, equipment's and recourse.
Parties must agree on resolution before calling the BG.
The favouree must give 6 weeks' notice before calling the BG.
64 On 5 September 2014, Mr Patterson sent an email to Mr Ekanayake in the following terms:
To assist with speeding up the process please see attached NAB draft BG. This is the proposed BG as security for the $1.735m loan [funds used for primary subcontractor mobilisation].
Ottoway is proposing a conditional BG:
(a) It will refer to contract number BCA3-ME-WC-3256 between Ottoway Engineering and Bluenergy CMC Pty Ltd
(b) Expiry date of 30 July 2015, ensures does not go past that date. Contract should be almost at an end by that time.
(c) The advance payment will be against project mobilization cost plant, equipment's and recourse.
(d) Parties must agree on resolution before calling the BG.
(e) The favouree must give 6 weeks' notice before calling the BG.
A number or all of these conditions may not be acceptable to Westpac.
Anything else required please let me know.
65 On 8 September 2014, Mr Patterson sent an email to Mr Young in the following terms:
The only feedback I received today was the Bank is working on the BG content for the Prepayment Loan. I expect this to be resolved tomorrow based on the discussions.
Those discussions did note the content/conditions of the BG's for that transaction and the Performance BG's where they are proposed to include:
(a) A termination date.
(b) Agreement on resolution before calling the BG.
(c) Favouree to give 6 weeks' notice before calling the BG.
will not be accepted. The Content/conditions will be in line with the content/conditions of the BG's already being issued to CP as outlined in the Contract.
I will be on the phone again early and will feedback to you any meaningful news.
66 Mr Young responded to Mr Patterson on 9 September 2014 advising him that the applicant would conform with the wording which the bank required. He also said the following:
We would like the guarantee to have an expiry date no later than 60 days after practical completion.
If that is not acceptable just add another month until they say yes.
It might be noted at this point that, if anything, this suggests that on this matter at least, BCMC was negotiating on behalf of the applicant, not the respondent.
67 On 11 September 2014, Mr Patterson sent to Mr Chapman a draft Bank Guarantee in the amount of $1,735,000. Mr Chapman's preliminary view was that the proposed wording of the Bank Guarantee would "infer" that repayment of the Bill Facility was linked to the works being undertaken. Mr Chapman was not prepared to proceed on that basis and he sought advice from the respondent's internal legal department. He wrote to Mr Ekanayake in the following terms:
Can you please send this to legal for their opinion with the deal, or a summary of the deal.
The Guarantee attached is a NAB guarantee, and the word doc is info suggested to be inserted. I have a feeling that it shouldn't have the details of mobilization etc, as I think that will infer our interest in the actual works being completed.
68 The advice received was as follows:
Subject to the Accommodation Guarantees being in favour of Westpac Banking Corporation and as the NAB is issuing these Accommodation Guarantees at the request of Ottoway Engineering Pty Ltd they will appear as the Customer on the document, however in the Agreement Panel, it will need to clearly state that it is issued to secure the lending obligations of Bluenergy CMC Pty Ltd to Westpac, the format of the Accommodation Guarantees are acceptable to Westpac.
69 On 15 September 2014, Mr Chapman sent an email to Mr Patterson in the following terms:
Hi Don - We've just had Legal come back again with comment on the Ottoway Guarantee.
Comments below.
Subject to the Accommodation Guarantees being in favour of Westpac Banking Corporation and as the NAB is issuing these Accommodation Guarantees at the request of Ottoway Engineering Pty Ltd they will appear as the Customer on the document, however in the Agreement panel it will need to clearly state that it is issued to secure the lending obligations of Bluenergy CMC Pty Ltd to Westpac, the format of the Accommodation Guarantees are acceptable to Westpac.
Could you please forward to Ottoway and have them arrange their Guarantees in this format.
We're nearly there Don.
70 On the following day, Mr Chapman spoke to BCMC which advised that the applicant "are happy to have the wording that our Legal suggested included in their Guarantee to Westpac".
71 The applicant sought to make something of Mr Chapman's concern about the reference to the works and the fact that, despite that concern, the reference remained in the earlier guarantee. I do not think that there is any significance in this evidence. Mr Chapman sought legal advice and then followed it. Mr Chapman's concern does not necessarily represent the view of the respondent and, in any event, a subjective belief is irrelevant.
72 The applicant also sought to make something of an email from Mr Patterson to Mr Chapman on 16 September 2014, I think to support their case of a principal and agent relationship between the respondent and BCMC. The email is in the following terms:
Just been on the phone to Ottoway regarding the Bank Guarantees, indications are NAB, while reluctant, has already provided a Bank Guarantee in favour of Westpac for $1,735m, which contains the required wording [I expect to receive it in Subiaco early tomorrow morning]. However, with regards to the performance Bank Guarantees 2 x $867,500 they are prepared to issue the guarantees in favour of Bluenergy only, excluding the additional wording.
Knowing our end game - prepayment to Ottoway $1.735m, retrieve $1.735m from cash held as security to Sino, guarantees to Sino of $2.2698m what is the solution???
73 I do not think this correspondence adds to the applicant's agency case. The correspondence is consistent with the banker and customer relationship which, in fact, existed between the respondent and BCMC.
74 On 18 September 2014, NAB provided a guarantee in favour of the respondent in the amount of $1,735,000. This is the earlier guarantee referred to in these reasons. As I have said, but for the amount, the earlier guarantee and the Guarantee were in relevantly identical terms. I set out the full terms of the Guarantee below (at [90]). In the circumstances, there is no need to set out the terms of the earlier guarantee.
75 On 18 September 2014, Mr Patterson sent an email to Mr Chapman attaching a copy of the bank guarantee issued by NAB in favour of the respondent in the amount of $1,735,000.
76 On 25 September 2014, Mr Millen and Ms O'Brien executed a Guarantee and Indemnity in favour of the respondent in relation to the liabilities of BCMC with a limit of $4,025,000. The Bill Facility was drawn down on 26 September 2014 and, on the same day, BCMC made the advance payment to the applicant by cheque in exchange for the earlier guarantee.
77 It is convenient to note at this point that Mr Chapman said, and I accept, that he had no contact with anybody from E & A or the applicant. The only dealing he had with a person who had a relationship with E & A or the applicant was when he attended at the offices of NAB and exchanged the earlier bank guarantee for the Guarantee. Mr Chapman said that he was aware that BCMC was entering into a subcontract with the applicant, although he was not provided with a copy of the Subcontract. Mr Chapman was not aware of the Alliance Agreement.
78 Shortly after mobilising to the site, it became apparent to the applicant that the completion of the scope of works under the Subcontract would be delayed by reason of a failure of Sino Iron to issue complete drawings and supply free issue materials. The applicant notified BCMC of the delays to the applicant's work and the potential for claims by the applicant against BCMC for both time and money as a result of the failure to release a complete set of "for construction" drawings and free issue materials. Mr Young said that BCMC would have similar claims against Sino Iron because the Head Contract and the Subcontract were, for the most part, "back to back". As it happened, the applicant did not make any formal claims under the Subcontract against BCMC. During the period from late September to early October 2014, the applicant continued to perform what works it could under the Subcontract despite the ongoing delays. In addition, it entered into discussions with BCMC for the termination of the Subcontract and the making of what would become the Alliance Agreement.
79 At about this time, the applicant and BCMC decided to work together to formulate claims for delay against Sino Iron which would be submitted by BCMC to Sino Iron. Mr Young described this as "the genesis of the basis of an Alliance Agreement between Ottoway and BCMC". BCMC agreed to waive any requirements for the applicant to serve delay and variation notices whilst the Alliance Agreement was being negotiated.
80 Prior to the applicant and BCMC finalising the Alliance Agreement on 12 February 2015, the applicant and BCMC submitted claims to Sino Iron in accordance with the Subcontract, and BCMC withheld 10% of payments made to the applicant in accordance with the Advance Payment Agreement.
81 The applicant submitted its first tax invoice for works done under the Subcontract on 12 December 2014 and that invoice related to works performed during the month of September 2014 and was for the "October 2014 payment claim".
82 Mr Young states, and I accept, that he reached an agreement with Mr Millen in or about October 2014 to the effect that the applicant and BCMC would abandon the Subcontract and enter into the Alliance Agreement and, as a result, all claims for payment were submitted by the applicant to BCMC and, in turn, by BCMC to Sino Iron on the basis of an alliance arrangement.
83 Mr Young gave evidence of what he considered at the time to be the benefits of the Alliance Agreement and the discussions that he had with Mr Millen and other representatives of BCMC about the Alliance Agreement. He states that it took some time to finalise the Alliance Agreement, but that between October 2014 and the finalisation of the Alliance Agreement on 12 February 2015, the applicant and BCMC conducted themselves as if the Alliance Agreement had already been entered into. For example, there were management meetings at which the finalisation of the Alliance Agreement was discussed and arrangements made for the submission of claims to Sino Iron on the basis of an Alliance Agreement. I accept this evidence.
84 Mr Young said that prior to the applicant entering into the Alliance Agreement on 12 February 2015, he understood that BCMC had been paying down its loan facility with the respondent. In his discussions with Mr Millen between October 2014 and February 2015, he asked that there be included in the Alliance Agreement a clause to the effect that the earlier guarantee provided in respect of the advance payment be replaced progressively by bank guarantees for lesser amounts. He said that as at February 2015, BCMC should have repaid to the respondent in excess of $500,000 from payments from Sino Iron as a result of the applicant performing the scope of works under the Subcontract. I accept this evidence.
85 On 12 February 2015, the applicant and BCMC entered into the Alliance Agreement. The background to the Alliance Agreement is sufficiently described in the recitals to the agreement which were as follows:
1. The Project Owner has developed the largest magnetite mining and processing operation in Australia known as the Sino Iron project at Cape Preston, 100 kilometres South-West of Karratha in Western Australia's Pilbara region, focused on delivering a world class magnetite Iron ore development. (Project).
2. The Project Owner selected the Contract Owner to provide mechanical and piping installation and commissioning works relating to Dewatering Buildings 313 and 314 and Conveyor Repairs (the Works) and entered into a Works Contract number BCA3-ME-WE-3256 with the Contract Owner on or around 30 July 2014 to record each party's rights and obligations in respect thereof (the Works Contract).
3. The Contract Owner in turn outsourced the Works under the Works Contract to Participant 2 through a contract numbered SCBCA3-ME-WC-3256 dated 21 August 2014 (the Participant Contract).
4. The Participants have since undertaken to enter into an agreement to perform their respective roles in relation to the Project in a spirit of cooperation and openness with the objective of performing the Works.
5. The Participants have now agreed to enter into this Agreement for the performance of the Works and agree that the entering into and execution of this Agreement will automatically nullify and void the Participant Contract.
6. The Participants are committed to performing their respective roles and achieving the Project Owner's requirements in the carrying out of the Project and the performance of the Works, in return for the payments set out in the Works Contract and with a view to:
a. performing the Works and meeting the requirements of the Works Contract; and
b. meeting the Agreement Objective.
86 The agreement provided for progress payments from the owner to be used for the reimbursement of costs and corporate overheads (as defined) and to the extent the payments were insufficient, a "painshare" arrangement and to the extent there was a surplus, a "gainshare" arrangement.
87 Clause 14.7, which describes the applicant as Participant 2 and BCMC as Participant 1, dealt with repayment of the advance payment. It is as follows:
14.7 Repayment of Advance
Participant 2 agrees to repay the cash advance payment of $1,750,000.00 made by Participant 1 to Participant 2 (Advance) by way of distribution to Participant 1 of the first 10% of Participant 2's portion of every progress claim made by Participant 2 until such time as the Advance has been repaid in full. For the avoidance of doubt, this amount is in addition to any other amounts to which Participant 1 is entitled to receive pursuant to this clause 14.
Participant 1 agrees to arrange for Participant 2's portion of the bank guarantee provided in respect of the Advance to be reduced by the amount of $250,000.00 for every $250,000.00 repayment milestone met by Participant 2 in repaying the Advance (that is, Participant 1 agrees to arrange for the reduction of Participant 2's portion of the bank guarantee in seven equal instalments whenever a cumulative $250,000 portion of the Advance has been repaid by Participant 2 to Participant 1, until the value of the Advance has been reduced to $0).
88 Clause 24.1 dealt with security and was in the following terms:
24.1 Security
(a) As at the date of this Agreement, Participant 1 has provided an irrevocable and unconditional bank guarantee in favour of the Project Owner in the amount of $2,269,800.00 (Original Guarantee) on the terms and conditions of the Works Contract as security for performance by the Participants of their respective terms, covenants and responsibilities under this Agreement.
(b) The Participants acknowledge and agree that all security required to be provided by them under this Agreement will at all times be provided by each Participant in the following proportions:
(1) Participant 1 - 50% and
(2) Participant 2 - 50%.
(c) In recognition of Participant 1 providing the Original Guarantee, Participant 2 agrees, within 2 Business Days of the execution of this Agreement, to provide a Bank Guarantee in favour of Participant 1 for the sum of $1,134,900.00 as security for the performance of Participant 2's obligation under this Agreement.
89 BCMC and the applicant subsequently agreed that the applicant would instruct NAB to issue on its behalf two performance guarantees in favour of the respondent. NAB issued two guarantees each in the amount of $567,450 in favour of the respondent, one to be released within seven business days of practical completion and the other to be released within seven business days of the expiration of the defects liability period.
90 On 12 June 2015, the applicant caused NAB to provide the Guarantee in the amount of $1,000,000 to the respondent as a replacement for the earlier guarantee in the sum of $1,735,000. I set it out in full, save and except for the provision of the date and the execution clause:
National Australia Bank Limited ("Bank")
ABN 12 004 044 937
Bank Guarantee
Guarantee No : 24705739
Ref :852967227 - 860556674
To:
WESTPAC BANKING CORPORATION
A.C.N./A.R.B.N./ABN 33 007 457 141
(The Beneficiary)
For:
OTTOWAY ENGINEERING PTY LTD
A.C.N./A.R.B.N./ABN 125531428
(The Customer)
Agreement:
PROJECT MOBILIZATION COST PLANT, EQUIPMENT'S AND RECOURSE FOR CONTRACT BETWEEN OTTOWAY ENGINEERING PTY LTD ABN 70 125 531 428 AND BLUENERGY CMC PTY LTD ABN 33 160 063 187 EXECUTED ON THE 21ST OF AUGUST 2014 FOR THE PROVISION OF MECHANICAL & PIPING INSTALLATION & COMMISSIONING WORKS RELATING TO DEWATERING BUILDINGS 313 AND 314 CONVEYOR REPAIRS. THIS BANK GUARANTEE ISSUED TO SECURE THE LENDING OBLIGATIONS OF BLUENERGY CMC PTY LTD TO WESTPAC BANKING CORPORATION
Amount: 1,000,000 Currency of AUSTRALIAN DOLLARS
Amount in words: ONE MILLION DOLLARS
1. In consideration of the Beneficiary agreeing at the request of the Customer and the Bank to accept this guarantee in connection with the agreement, the Bank undertakes to pay the Beneficiary an amount or amounts not exceeding the Amount in total.
2. Payment of the Amount or any part or parts of the Amount will be made by the Bank to the Beneficiary:
a) upon the Bank receiving at any NAB branch located within Australia while this guarantee remains in force an unconditional written demand from the Beneficiary accompanied by this guarantee; and
b) without reference to the Customer; and
c) despite any notice given to the Bank by the Customer not to pay the Beneficiary any moneys payable under this guarantee; and
d) irrespective of the performance or non-performance by the Customer or the Beneficiary of the Agreement in any respect; and
e) with no obligation on the Bank to enquire as to the performance or non-performance of the Agreement in any respect by the customer or the Beneficiary; and
f) with no obligation on the bank to enquire as to the correctness or validity of any demand pursuant to sub-clause 2(a) of this clause.
g) at the Bank's election in cash, bank cheque or funds transfer into the Beneficiary's nominated account.
3. Where a demand and payment is made pursuant to clause 2, for a sum that is less than the Amount, the Bank will issue to the Beneficiary a replacement guarantee for the balance of the Amount then remaining, after such part payment or payments.
4. The Bank's liability under this guarantee is not affected or discharged in any way by any variation of the Agreement or by any extension of time or other forbearance on the part of the Beneficiary or the Customer to the other.
5. The Bank may terminate this guarantee at any time upon payment to the Beneficiary of the Amount or the balance of the Amount remaining after any part payment of the amount, or such lesser amount as the Beneficiary requires.
6. If two or more persons are named as the Beneficiary, this guarantee takes effect for the benefit of them jointly and a demand under this guarantee by any one or more of them is deemed to be a demand by both or all of them jointly. Payment by the Bank under this guarantee to any one or more of them discharges this guarantee to the extent of the amount so paid.
7. The benefit of this guarantee is not assignable by the Beneficiary.
8. This guarantee continues in force until the earliest of the following occurs:
a) this guarantee is returned to the Bank at any NAB branch located within Australia (other than for a payment in accordance with clause 2(a));
b) notification in writing has been received by the Bank at any NAB branch located within Australia from the Beneficiary that this guarantee is no longer required;
c) payment is made under clause 2 or 5 to the Beneficiary by the Bank of the whole of the Amount or the balance of the Amount remaining after any part payment or payments of the Amount, or such lesser amount as the Beneficiary requires;
d) the close of business on the Termination Date (if any).
9. In the events of clause 8(b), (c) & (d), the Beneficiary must return this guarantee to the Bank at any NAB branch located within Australia.
10. This guarantee is governed by and is to be construed in accordance with the laws of the place where it is executed by the Bank.
91 It may be noted that the Guarantee refers to the Subcontract even though by then it had been replaced by the Alliance Agreement. Although the applicant sought to make something of this in its Amended Statement of Claim, it did not do so at trial. No doubt it had in mind that if it rendered the reference to the contract between it and BCMC ineffective, it would leave only the reference to the financial arrangements between the respondent and BCMC.
92 Two days prior to the execution of the Guarantee, that is to say, on or about 10 June 2015, Mr Patterson sent an email to Mr Alaraj with the following advice:
Note the balance of the loan account stands at $989,268.12, after last payment of $44,007.68 from the CPM April Advance Payment of $550,096.00.
93 Mr Chapman met a representative of NAB's corporate team in Perth to exchange the earlier guarantee for the Guarantee.
94 The applicant continued to perform the scope of works and it received payment for those works from BCMC as an agreed percentage of progress payments made by Sino Iron to BCMC. Mr Young said that from in or about October 2014, the applicant and BCMC adopted a collaborative approach to the preparation of payment claims for submission to Sino Iron. The practice was that at the end of each month, the applicant's project managers who were on site communicated the total cost of works performed by the applicant and the percentage of works completed to Mr Alaraj to enable him to communicate the information to Mr Patterson of BCMC. Based on that information, BCMC submitted progress claims to Sino Iron on behalf of BCMC and the applicant. Mr Young referred to cl 14.2 of the Alliance Agreement and said that the applicant advised BCMC of its actual costs incurred for each payment period. However, BCMC did not always inform the applicant as to its costs. Based on the profit distribution arrangements, the applicant was entitled to receive 80% of any income from Sino Iron. Mr Young said that the parties agreed in circumstances where the applicant was not aware of the costs incurred by BCMC that the applicant should be paid 80% of any recoveries from Sino Iron. This general approach operated until BCMC received monies from Sino Iron in late April 2015 at which time BCMC agreed to pay the applicant amounts determined by adopting a broad axe approach because of a significant shortfall of costs recoveries by the applicant and BCMC's failure to supply accurate particulars of their costs. BCMC made lump sum payments to the applicant of $2,500,000 for the February 2015 progress claim and $1,600,000 for the March 2015 progress claim.
95 Further difficulties arose in the relationship between the applicant and BCMC. Mr Young described the difficulties as the applicant not being paid and carrying unpaid costs and BCMC's employees not adopting a collaborative approach. Whatever the difficulties, they led to the termination of the Alliance Agreement and the entry into of a Labour Hire Agreement for the Dewatering Building 314 works. This came about as a result of meetings between Mr Young and Mr Millen on 30 June 2015, 1 July 2015 and 10 July 2015 respectively. Minutes of the meeting held on 10 July 2015 include the following:
CONDITION 10 PROGRESS CLAIM FINALISATION
PROPOSED
Final progress payments to be progressed as quickly as practical. Final payments to be adjusted for historical upfront advance payments. In the event final payments (June, July and outstanding claims) does not repay these advanced payments, advance payment to be continued to be reduced at 10% rate against the labour hire use. Bank guarantee for the advance to be continued to be held in this instance.
96 From 13 August 2015, the applicant and BCMC both performed the project works in accordance with the terms and conditions agreed on 10 July 2015 and the labour schedule of rates which Mr Young had forwarded to BCMC. The parties no longer had regard to the Alliance Agreement and all labour, plant and equipment supplied to BCMC, including hire of approximately 25 personnel from the applicant until 16 November 2015, were paid in accordance with the labour schedule of rates. The effect of what the parties agreed was that the advance payment reduction of 10% would continue under the Labour Hire Agreement. The applicant demobilised from the site on 16 November 2015 "as a result of the failure of BCMC to make payment of outstanding invoices to the applicant and resolve issues in dispute".
97 On 23 December 2015, the applicant served a Creditor's Statutory Demand for Payment of Debt dated 22 December 2015 on BCMC in the amount of $1,455,794.03 (Corporations Act 2001 (Cth), Part 5.4). BCMC did not make any payment to the applicant. On 10 February 2016, the applicant commenced winding up proceedings against BCMC. On 22 March 2016, which was the day before the winding up proceedings were listed for hearing, BCMC resolved to appoint Mr Kim Strickland and Mr David Hurt as joint and voluntary administrators of BCMC. On 30 March 2016, Mr Young became aware that the respondent intended to call upon the Guarantee. He received a telephone call from his bank representative at NAB asking which bank account he wished the draw to be charged against. On 30 March 2016, Mr Young received from NAB a copy of an unconditional written demand from the respondent to NAB dated 29 March 2016 demanding immediate repayment of the Guarantee in the amount of $858,158.96 to be substituted with a Bank Guarantee of $141,841.04.
98 On 5 April 2016, Mr Young attended the first meeting of creditors of BCMC held at the offices of WA Insolvency Solutions in Perth. Mr Young said that at that meeting, the administrators informed the meeting that BCMC had ceased trading and Mr Patterson added that there were only two employees remaining in February 2016. The administrators informed the meeting that BCMC had substantial creditors exceeding $20,000,000. On 13 April 2016, an order was made in the winding up proceeding that BCMC be wound up in insolvency and that Mr Michael Joseph Ryan be appointed as liquidator of BCMC. On 14 April 2016, Mr Martin John, Mr Dermott McVeigh and Mr Andrew Smith of Ferrier Hodgson were appointed as Receivers and Managers of BCMC by Bluenergy Capital Pty Ltd (now Ecap Finance Pty Ltd) pursuant to a General Security Agreement entered into on 5 November 2015.