Sudholz Pty Ltd v Airlie Summit Pty Ltd

[1] MACKENZIE J: The applicant applies for an injunction to restrain the respondent from calling upon a bank guarantee. The applicant and respondent entered into a contract under which the applicant was to perform a variety of development works in connection with a residential subdivision at Airlie Beach. The contract specified that the general conditions of contract would be the Australian Standard General Conditions of Contract AS4000-1997 together with any amendments, deletions, alterations and instructions annexed to it. Pursuant to special condition D2 the applicant provided a bank guarantee in favour of the respondent up to a maximum aggregate sum of about $275,000.

[2] It is sufficient to say that disputes arose during the course of performance of the contract that led to the applicant and respondent giving notices to show cause to each other. In each instance, responses were made by the recipient of the notice. A consequence was that on 1 March 2007 the respondent gave notice terminating the contract. On 6 March 2007 the applicant gave notice terminating the contract on the basis that the respondent's notice of termination was a repudiation of the contract.

[3] On 28 June 2007, the respondent attempted to call up the guarantee. The following day, the applicant, having learned of that, applied for an injunction. Undertakings were given which had the effect of stopping recourse to the guarantee for the time being. When the matter came on for hearing on the day when the undertakings were to expire, and it became apparent that it would be necessary to reserve judgment, orders were made that had a similar effect.

[4] The applicant relies on three propositions in support of preserving the status quo until the issues between the parties are resolved. The first, which is easily remedied and probably has already been remedied, is that five days' notice of the respondent's intention to have recourse to the guarantee had not been given. The respondent submitted that, notwithstanding clause 5.2, clause 39.10 provided for the respondent to have access to the guarantee without giving notice in circumstances where the respondent had a bona fide claim to have terminated the contract and to be owed money by the applicant.

[5] The second is that it was necessary that the respondent be entitled to payment of an entitlement under the contract before the guarantee could be relied on. This raises issues of construction and principle of which more will be said later.

[6] The third concerns the opposing contentions about termination of the contract, since recourse to the security is available to the party terminating the contract.

[7] It was an essential part of the applicant's argument that it was implicit in clause 5 that the respondent was not entitled to call upon the bank guarantee otherwise than in the circumstances specified in clause 5.2. It was submitted that to hold otherwise would deprive the clause of any operation. The clause was an implied negative stipulation. Reference was made to Pearson Bridge (NSW) Pty Ltd v State Rail Authority of NSW [1982] 1 AustConstLR 81 as an example of the application of the principle also applied in a variety of subsequent cases including a recent application of it in Austrak Pty Ltd v John Holland Pty Ltd [2006] QSC 103 by Chesterman J.

[8] There is evidence going to the issue of default from both sides. It is impossible and unnecessary, and it was not suggested otherwise, to determine that issue on this application.

[9] If the relief sought is available to the applicant, the evidence led by it appears on its face to be substantial, not shadowy, or lacking in substance. To say that is not to express any conclusion as to the strength of the respondent's evidence on the subject. It is merely a reflection of the onus on the issue of serious question to be tried in circumstances where reliance on insubstantial or shadowy evidence would be a negative factor.

[10] It was accepted by the respondent, which relied on Wood Hall Ltd v Pipeline Authority [1979] HCA 21; (1979) 141 CLR 443, 457 as an enunciation of the essential nature and purpose of a guarantee, that the principle therein was subject to exceptions. It was submitted that the only one of any possible relevance was the line of authority relied on by the applicant which held that an injunction would issue to restrain the breach of a negative stipulation in the underlying contract which conditioned the right to call up the bank guarantee. It was submitted by the respondent that in order to establish such an entitlement, the applicant must demonstrate a serious question to be tried, in the sense explained in Australian Broadcasting Corp v O'Neill [2006] HCA 46; (2006) 229 ALR 457, that the respondent's attempt to call up the guarantee was in breach of a negative stipulation in the contract and that the balance of convenience favoured restraining the calling up of the guarantee.

[11] Underlying the respondent's argument was the proposition that it was sufficient for it to establish, in relation to the applicant's second and third propositions, that it had a bona fide claim to terminate the contract and to be owed money by the applicant. It was also submitted that the balance of convenience did not favour the grant of an injunction because the applicant's material did not cogently establish that it would suffer irreparable prejudice for which damages would be an inadequate remedy. I will return to that issue later.

[12] In support of the proposition that a bona fide claim was sufficient, the respondent relied on the purpose of security in this kind of contract. The purpose said to be was to avoid the risk of being out of pocket during the determination of the dispute between the parties, by providing the respondent with access to funds to meet a sum allegedly owed to it. It was submitted that the requirement in clause 39.10 should be construed as a requirement that the party have a bona fide claim to have validly terminated the contract. Similarly the respondent did not need an established or indefeasible claim to be owed money by the applicant. A bona fide claim was sufficient. The requirement in clause 5.2 that the party having resort to the guarantee "remains unpaid" should be construed as a requirement only that there was a bona fide claim to be owed money which had not been discharged. The respondent relied on two decisions of the Victorian Court of Appeal, Fletcher Construction Australia v Varnsdorf Ltd [1998] 3 VR 812, 821-823, 828 and Bachmann Pty Ltd v BHP Power New Zealand Ltd [1998] VSCA 40; [1999] 1 VR 420, 436-437. It was noted that at 831 in Fletcher, Callaway JA observed that guarantees were an efficient substitute for cash and that it would be unfortunate if the law made them unattractive.

[13] As against this the applicant relied on Merritt Cairns Constructions Pty Ltd v Wulguru Heights Pty Ltd [1995] QCA 273; (1995) 2 Qd R 521, 526 where McPherson JA rejected the argument that the expression "money due" in the clause under consideration was apt to describe a claim which, as regards liability, had not yet been determined and, as regards quantum had not yet been ascertained. Davies JA at 521 reached a similar conclusion.

[14] The applicant also relied on Austrak where Chesterman J found a serious question to be tried as to whether the respondent had the right to demand payment against the guarantee when it did not assert the existence of a debt owed to it by the applicant. Both of those authorities, it was conceded, were not concerned with the particular clause in the present contract. That, of course, highlights that construction of an individual clause in a commercial contract is always the exercise to be undertaken. It was submitted that there were three pointers to the necessity of an amount to be actually owing rather than merely claimed. Firstly, the use of the words "time for payment" in clause 5.2 was apt to refer to a liquidated sum required to be paid under the contract. Secondly, it was submitted that the fact that the security was held in escrow vitiated against a broad entitlement to access the security. Thirdly, the requirement to give five days' written notice permitted the contractor to apply to the court to restrain access to the guarantee. That right would be severely circumscribed if it was only necessary to show a bona fide claim. It may be thought that the last two indicators are relatively slight. However the first one is arguably of some substance.

[15] Callaway JA observed in Fletcher at 831 that the case raised important questions of commercial law that were not as well settled in Australia as they were in England. He went on to say:

"In Australia it is complicated by the doubt attending the line of cases that begins with Pearson Bridge (N.S.W.) Pty. Ltd. v State Rail of Authority of N.S.W...."

In Bachmann, Brooking JA held that the particular clause was an express negative stipulation, but construed the contractual right conferred as not being confined to situations where money was "due" in some such sense as actually or indisputably due.

[16] It is plain from what has been said that the right to recourse depends on the terms of the contract and that the law is unsettled, in the sense that the cases of Fletcher and Bachmann cast some uncertainty on the line of authority that seems to have, to this point, taken a less constrained view of the circumstances in which injunctive relief will be granted. That line of authority seems to have been favoured in Queensland for a considerable period. I am satisfied that for the reasons given above the requirement that the applicant demonstrate a serious question to be tried has been satisfied.

[17] I should mention that there is also an argument about whether s 67J of the Queensland Building Services Authority Act 1991 (Qld) applies or not. There is an issue as to whether the contract is a building contract within the meaning of the Act and determination of that issue would be critical to deciding whether s 67J has any relevance to the matter. It is sufficient for present purposes to note that it is in issue between the parties as well as other matters.

[18] With regard to balance of convenience, the applicant has, through its managing director, deposed that if the guarantee is called up, the applicant's reputation and standing may be harmed. The argument essentially is that if the bank guarantee is drawn upon and it is required to disclose its security history to prospective clients as part of the due diligence process when tendering for work, its prospects of obtaining future work may be diminished. He deposes that in his experience, which extends over many years, it is usual for a principal to assess a prospective contractor's security history by way of a credit reference check and a search of the court registry. In addition, the applicant is pre-qualified to perform work for the Department of Main Roads which limits the size of the project a contractor can perform according to set criteria. A contractor's security history is material in that regard. That evidence is uncontradicted.

[19] The respondent's response is that the applicant's evidence is too vague to provide a cogent basis for concluding that it might suffer irreparable prejudice if the guarantee is called upon. The complaint is that the evidence does not go far enough to establish real detriment in the tendering process or risk of significant loss. For example, there is no evidence of the effect that calling up one guarantee might have on the size of projects that the applicant might be offered. It was submitted that evidence ought to be weighed, inter alia, according to the ability of the party to produce it. The absence of cogent evidence of detriment, it is said, suggests that the assertions of detriment are simply assertions and no more.

[20] The simple fact is that there is no evidence to contradict the evidence given on the applicant's behalf and there was no impediment to leave being sought to cross-examine the deponent if the veracity or accuracy of the evidence was to be challenged. Apart from the obvious prejudice of not being able to access the guarantee immediately, no other detriment on the part of the respondent is disclosed. I am satisfied that the balance of convenience is in favour of the restraint sought by the applicant.

[21] The usual undertaking as to damages was offered on behalf of the applicant in the event that the relief it sought was granted. As to the form of order, paragraph 1 of the order made on 24 July 2007 required an instruction to be given by the respondent to Westpac Banking Corporation not to convert the bank guarantee into money until further order. The respondent's obligation under it became spent upon compliance with it. Its effect was to instruct the bank not to convert the guarantee into money until further order. The paragraph is redundant in the order to be made because a restraint identical in principle to paragraph 2 of the orders made on 24 July 2007 will prevent conversion of the guarantee into money prospectively from the time of making of the order.

Upon the applicant, by its counsel, providing the usual undertaking as to damages:

1. The respondent, whether by itself, its officers, servants, agents or assigns, take no steps to make any demand that Westpac Banking Corporation convert the bank guarantee exhibited to the affidavit of Matthew Bradbury, filed in this proceeding on 29 June 2007 into money until further order.

2. The application be adjourned to a date to be fixed.

3. Each party have liberty to apply on two days written notice to the other party.

4. Costs of and incidental to the application shall be costs in the cause.