Did Redline make out a prima facie case?
23 In discussing the requirement that an applicant for an interlocutory injunction demonstrate a prima facie case, Gummow and Hayne JJ in Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57 at [65] observed:
it is sufficient that the plaintiff show a sufficient likelihood of success to justify in the circumstances the preservation of the status quo pending the trial.
24 Redline contended MCC Mining was precluded from calling upon the unconditional undertaking by reason of the terms of a negative stipulation implied in cl 5.2 of the contract. Redline said that the Full Court in Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd (2008) 249 ALR 458 (Clough Engineering), recognised this ground as the third of three exceptions to the general rule that a court will not interfere with the exercise, by a beneficiary, of a right to call upon an unconditional performance guarantee or bond.
25 Redline referred to the wording of cl 5.2 and said that the particular attention needed to be paid to the words "time for payment" in the context of the phrase "security shall be subject to recourse by a party who remains unpaid after the time for payment". Redline contended that those words were to be construed as requiring, as a condition of the exercise of MCC Mining's right to call on the undertaking, that it had been determined, pursuant to a mechanism under the contract, that Redline was liable to pay MCC Mining the amount demanded and that amount was not the subject of a set-off. Redline went on to say that cl 5.2 should be construed as if, after the words "time for payment", the following words appeared "of an amount which has been determined as owing pursuant to a mechanism under the contract, and which is not the subject of a set off".
26 Consistently with this contention, Redline said that MCC Mining was not entitled to call upon the unconditional undertaking because there had been no determination under the contract that the amounts claimed in the letters of demand were due for payment; and, in any event, those claims were subject to being set off against the amounts claimed by Redline in its notice of dispute.
27 Further, Redline also contended that MCC Mining had engaged in misleading or deceptive conduct in relation to the representations that it had made in the specifications regarding the tolerance standards of the pipe which would be provided to Redline for installation under the contract. Redline contended that it had been induced by the representations as to the tolerance standards, to tender at a contractual price substantially lower than it would otherwise have done, had MCC Mining not engaged in the misleading or deceptive conduct. Redline contended that the misleading or deceptive conduct claim was to be treated, by analogy, as falling within the unconscionability exception - recognised by the Full Court in Clough Engineering as the second of the exceptions to the general rule. In support of that contention, Redline said that MCC Mining could not be permitted to take advantage of its own wrongdoing.
28 In my view, Redline has not demonstrated that there is a sufficient likelihood of success at trial, to justify the maintenance of the status quo pending a trial, by the Court granting an interlocutory injunction precluding MCC Mining from calling upon the unconditional undertaking.
29 In Clough Engineering, the Full Court succinctly reviewed the authorities dealing with the circumstances in which the beneficiary of a performance bond would be precluded from calling upon the performance guarantee or bond. At [75]-[85], the Full Court (French J, as his Honour then was, Jacobson and Graham JJ) observed:
[75] The principles under which a court will construe the terms of a bank's undertaking in a performance guarantee, and the contract between a contractor and an owner, have been stated in a series of authorities over the last 30 years. The seminal decision is that of the High Court in Wood Hall Ltd v Pipeline Authority (1979) 141 CLR 443 (Wood Hall).
[76] Reference was made in Wood Hall to the commercial purpose of the guarantees, which in that case was that they be equivalent to cash: see Barwick CJ (at 445); Gibbs J (at 453); Stephen J (at 457-458). As Stephen J observed, to introduce a qualification on the entitlement of the owner to call upon the performance guarantees (at 457):
…would be to deprive them of the quality which gives them commercial currency.
Barwick CJ and Gibbs J expressed similar views to Stephen J. Gibbs J stated the argument made on behalf of the contractor, which was that the performance guarantee must be construed in light of the contract between the authority and the contractor (at 450). His Honour rejected the submission that the right to invoke the guarantee was conditional upon the contractor having committed a breach of its primary obligations under the contract. He placed emphasis upon the express statement in the guarantee that the undertaking of the bank was unconditional (at 451).
[77] Nevertheless, the authorities have recognised three principal exceptions to the rule that a court will not enjoin the issuer of a performance guarantee, or bond, from performing its unconditional obligation to make payment. The exceptions were succinctly stated, with references to relevant authorities, by Austin J in Reed Construction Services Pty Ltd v Kheng Seng (Aust) Pty Ltd (1999) 15 BCL 158 at 164-165 (Reed):
First - the court will enjoin the party in whose favour the performance guarantee has been given from acting fraudulently: see, for example, Wood Hall per Gibbs J (at 451). As the primary judge observed at [36] Clough does not assert that ONGC has made a fraudulent claim. Accordingly, the first exception has no application in the present case.
Second - the party in whose favour the performance bank guarantee has been given may be enjoined from acting unconscionably in contravention of s 51AA of the TPA: Olex Focas Pty Ltd v Skodaexport Co Ltd [1998] 3 VR 380. On this point, different views have been expressed about the reach of s 51AA. The High Court has not determined which of these views is correct: Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51 at [44]-[45] (CG Berbatis Holdings). In any event, none of the categories of unconscionable conduct recognised in Australian Competition and Consumer Commission v Samton Holdings Pty Ltd (2002) 117 FCR 301 at [48] (Samton Holdings) apply in this case. Accordingly, the second exception has no application.
Third - the most important exception for present purposes, is that, whilst the court will not restrain the issuer of a performance guarantee from acting on an unqualified promise to pay (Reed Construction Services at 164 per Austin J):
…if the party in whose favour the bond has been given has made a contract promising not to call upon the bond, breach of that contractual promise may be enjoined on normal principles relating to the enforcement by injunction of negative stipulations in contracts.
It may be preferable not to describe this as an exception but rather as an over-riding rule because it emphasises that the "primary focus" will always be the proper construction of the contract: Bateman Project Engineering Pty Ltd v Resolute Ltd (2000) 23 WAR 493 per Owen J at [30]. Stephen J recognised this in Wood Hall at 459 by observing that the provisions of the contract may qualify the right to call on the undertaking contained in a performance guarantee.
[78] Numerous authorities have accepted the third proposition. Many were referred to in Reed at 165. Others include Fletcher Construction at 826-827; Bachmann Pty Ltd v BHP Power New Zealand Ltd [1999] 1 VR 420 at [28] (Bachmann); Baulderstone Hornibrook Pty Ltd v Qantas Airways Ltd [2000] FCA 672 at [10], Rejan Constructions Pty Ltd v Manningham Medical Centre Pty Ltd [2002] VSC 579 at [37].
[79] In Fletcher Construction, Charles JA at 821 and Callaway JA at 826 recognised that there are generally two commercial reasons why a beneficiary of a performance guarantee may have stipulated for such an entitlement. One is to provide security for a valid claim against the contractor. The second, which is additional to the first, is to allocate the risk between the parties as to who shall be out of pocket pending the resolution of a dispute between them. Callaway JA went on to observe that it is a question of construction of the underlying contract whether the guarantee is provided solely by way of security or also as a risk allocation device. He went on to say (at 827):
Remembering that we are speaking of guarantees in the sense of standby letters of credit, performance bonds, guarantees in lieu of retention moneys and the like, the latter purpose is often present and commercial practice plays a large part in construing the contract. No implication may be made that is inconsistent with an agreed allocation of risk as to who shall be out of pocket pending resolution of a dispute and clauses in the contract that do not expressly inhibit the beneficiary from calling upon the security should not be too readily construed to have that effect. As I have already indicated, they may simply refer to the kind of default which, if it is alleged in good faith, enables the beneficiary to have recourse to the security or its proceeds.
[80] It seems to us that his Honour's reference to a default "alleged in good faith" was intended to embrace the first exception we have set out above. That is to say, the breach relied upon to support a call on the performance guarantee must not be asserted fraudulently because the court will enjoin a party from so acting. Thus, subject to the exceptions of fraud and unconscionability, the beneficiary of a performance guarantee granted in its favour as a risk allocation device, will be entitled to call upon the guarantee even if it turns out, ultimately, that the other party was not in default: Fletcher Construction at 827.
[81] In determining whether the underlying contract confers an unfettered right to call upon the performance guarantee, the importance of such instruments in the construction industry, both nationally and internationally, is a factor which bears upon the question of construction of the contract. A number of authorities support this proposition:
(1) In Wood Hall at 457-458, Stephen J referred to English authority which described the performance guarantee as standing on a similar footing to a letter of credit.
(2) In the passage from the judgment of Callaway JA in Fletcher Construction at 827 quoted above, his Honour emphasised the importance of commercial practice in construing the contract. The reference in the judgment of Charles JA at 822 to the passage from Hudson's Building and Engineering Contracts, is to similar effect.
(3) In Bachmann, Brooking JA referred at [51] to the practice in the United States. He said that the generally accepted view in that country is that standby letters of credit (and hence, performance guarantees) are intended by the parties to the underlying contract to require the supplier or contractor to:
…stand out of the amount of the credit in favour of the buyer pending resolution of the underlying dispute.
(4) This approach is supported by the observations of Hobhouse LJ in Toomey v Eagle Star Insurance Co Ltd [1994] 1 Lloyd's Law Rep 516 at 520, that parties to a commercial contract are to be taken to have contracted against a background which includes the earlier authorities on the construction of similar contracts.
[82] Notwithstanding the importance of commercial practice, the statements in these authorities do not suggest that the court should depart from the task of construing the terms of the contract in each case. What the authorities emphasise is that the commercial background informs the construction of the contract. In particular, as Callaway JA said in the passage quoted above, the court ought not too 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.
[83] It follows that 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, non-fraudulently. This view is also supported by the remarks of Charles JA in Fletcher Construction at 820-821. There, his Honour analysed and placed some doubt upon the correctness of decisions such as Pearson Bridge (NSW) Pty Ltd v State Rail Authority of New South Wales (1982) 1 Aust Const LR 81 at 86 (Pearson Bridge).
[84] In Pearson Bridge at 86, and in other authorities which have followed it, Yeldham J held that the words "(i)f the Principal becomes entitled to exercise all or any of the rights under the Contract" contained an implied negative stipulation which qualified the Principal's entitlement to call upon the guarantee. In Fletcher Construction, Charles JA at 820-821 appeared to prefer the views of Cole J in Hughes Bros Pty Ltd v Telede Pty Ltd (1989) 7 BCL 210, where his Honour concluded that a similar clause contained no such qualification.
[85] 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. This accords with the basic principle of construction that the terms of an instrument must be read as a whole: Re Media, Entertainment and Arts Alliance; Ex parte Hoyts Corp Pty Ltd (1993) 178 CLR 379 at 386-387. It also accords with the approach taken to the construction of the underlying contract in the leading authorities to which we have referred: see, for example, Wood Hall at 445, 451, 457-458; Fletcher Construction at 821-822. (Footnotes omitted.)
30 In my view, the application of these observations militates strongly against Redline's contention as to the proper construction of the contract, and, in particular cl 5.2 of that contract.
31 First, the contract is to be construed in its commercial context, namely, that performance guarantees and like instruments, are treated as providing the beneficiary thereof with a security which is only defeasible in such limited circumstances, that it is to be regarded as approximating cash. Further, the parties to a contract which provides for the issue of a performance bond, are to be taken as having contracted, in the knowledge of the special status accorded to performance bonds in the industry, and the legal principles relating to the construction of contractual terms insofar as they affect the right of a beneficiary to call upon a performance bond.
32 The construction of the contract advanced by Redline imposes conditions upon the exercise of the right to call upon the unconditional undertaking, which have the propensity to undermine substantially the commercial purpose of requiring a contractual party to provide a performance bond. This is particularly so, insofar as Redline contended that the contract was to be construed in such a way as to preclude MCC Mining from calling upon the unconditional undertaking on the basis of Redline's claim to a set off.
33 As the Full Court observed in Clough Engineering, it would require very clear wording for a contract to impose conditions such as those contended for, which so substantially undermine the effectiveness of a performance bond as a commercial security instrument. In my view, this contract does not contain wording which answers this description.
34 Secondly, the contract must be construed in light of the whole contract and the language of the performance bond itself. In this case, the relevance of the language used in the unconditional undertaking to the question of construction, is demonstrated by the fact that the parties contracted for the unconditional undertaking to be supplied in the specific form annexed to the contract as annexure "CD6".
35 In my view, the language of the contract and the unconditional undertaking is inconsistent with Redline's contention that the exercise of the undertaking is conditioned by the matters to which it referred. First, effect must be given to the fact that the parties have chosen to characterise the undertaking as "unconditional". Thus, the definition of "security" in the contract, refers specifically to the need to provide an "unconditional" undertaking. Further, the language of the undertaking provides that the surety "unconditionally undertakes to pay on demand any sum or sums which may from time to time be demanded by [MCC Mining]". The undertaking also provides that the surety "unconditionally" agrees to make the payment demanded "without reference to [Redline] and notwithstanding any notice given by [Redline] not to pay the same".
36 On the basis of the contentions made at this hearing, it is my view, that there is not sufficient likelihood of Redline succeeding in making good its contention in relation to the proper construction of cl 5.2, at trial, to justify the maintenance of the status quo until trial, by enjoining MCC Mining from calling upon the unconditional undertaking. I am of the view, that it is more likely that at trial, the words "time for payment" in the phrase "a party remains unpaid after the time for payment" in cl 5.2 of the contract, will be construed as referring to the time specified by MCC Mining for Redline to make the payment demanded and not as importing the inhibiting restrictions contended for by Redline; and that cl 5.2 will be construed as a clause intended to allocate risks pending the resolution of the underlying dispute.
37 Further, in my view, Redline's contention that its potential claim for misleading or deceptive conduct is to be regarded as a basis for precluding MCC Mining from calling upon the undertaking, by analogy with the unconscionability exception, does not have sufficient prospects of success at trial to warrant granting the interlocutory injunction claimed. The commercial utility of having the benefit of a performance bond would be rendered virtually nugatory if that proposition was correct.
38 Redline also made submissions in relation to the strength of its claim that MCC Mining had breached the contract by failing to supply pipe which met the tolerance standards in the specifications. However, the submissions depended upon cl 5.2 being construed so as to constitute a claim to a set off, as an inhibiting condition on the exercise of the right to call upon the unconditional undertaking. As I have already mentioned, there is, in my view, insufficient prospect of cl 5.2 of the contract being construed in this manner, to warrant the granting of an interlocutory injunction. It follows that this submission of Redline falls away.
39 In light of the findings to which I have come, it is not necessary for me to address the question of the balance of convenience.
40 I, accordingly, dismiss Redline's application for an interlocutory injunction.
I certify that the preceding forty (40) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Siopis.