Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [2015] VSCA 98

Court of Appeal (Vic)|2015-05-13|Before: Mr P, Kaye JA, Osborn JA, Ferguson JA

Lend Lease Pty Ltd v Sugar Australia Pty Ltd [2014] VSC 476

BUILDING CONTRACTS - Bank performance security - Security for claims by proprietor acting reasonably - Application by contractor for interlocutory injunction to restrain recourse to security - Construction of security clause - Whether serious issue whether proprietor acting reasonably in seeking recourse to security - Whether serious issue to be tried as to validity of recourse notice - Balance of convenience.

1 This is an appeal against a decision to grant an interlocutory injunction restraining recourse to two bank guarantees provided by way of performance bonds[1] by a builder to an owner under a building contract.

2 The facts of the matter are set out fully in the judgment of Kaye JA, which we have had the considerable advantage of reading in draft. It is unnecessary to repeat them in detail for the purpose of our reasons.

3 We agree with Kaye JA's conclusions that the appeal should be allowed and the injunction should be set aside. We also agree with his Honour's reasons subject only to the following matters.

4 In 2007, by an agreement in writing substantially adopting a standard form contract, the respondent agreed to design, construct, supply and install a new refined sugar plant at premises in Yarraville for an adjusted contract price of $42,485,189 excluding GST. The agreement required the respondent to provide the appellant with security in the form of two unconditional bank guarantees for an amount representing five per cent of the original contract sum, being $4,190,000 in aggregate.

5 The security was required to be provided in accordance with the form and terms of a pro forma 'unconditional undertaking' contained in an annexure to the agreement. On 26 June 2007, the respondent provided in the required form two unconditional undertakings from a bank in the sums required.

6 General condition 5.2 ('GC 5.2') of the agreement governed the availability of recourse to the security provided as follows:

Any security provided by the Contractor in accordance with the Contract shall be available to the Principal whenever the Principal may claim (acting reasonably) to be entitled to:

(i) the payment of monies or an indemnity by the Contractor under or in consequence of or in connection with the Contract;

(ii) reimbursement of any monies paid to others under or in connection with the Contract; or

(iii) other monies payable by the Contractor to the Principal (whether by way of set off or otherwise).

Recourse to security shall only be subject to the Principal having given the Contractor five days' notice of its intention to have recourse to the security for the purpose of allowing the Contractor to replace the security with cash where it has been issued in a form other than cash. Where the Principal has recourse to security in accordance with clause 37.3, the Contractor shall provide replacement security in accordance with clause 37.3.

7 For the reasons explained by Kaye JA, dispute arose between the parties during the performance of the contract works. In September 2011, the respondent purported to terminate the contract pursuant to its conditions, and in November 2011, the appellant also purported to terminate the contract pursuant to its conditions.

8 On 8 August 2014, the appellant gave written notice to the respondent of its intention to have recourse to the bank guarantees ('the recourse notice').

9 On the same day, the appellant commenced proceedings in the Technology Engineering and Construction List of this Court claiming damages totalling $9,443,291.

10 On 12 August 2014, the respondent independently commenced its own proceeding in this Court claiming $17,904,746, by way of sums allegedly due under the agreement together with $67,171,483 by way of damages for project losses.

11 The respondent also sought declarations that the appellant had wrongfully purported to issue the recourse notice in respect of the bank guarantees and that the recourse notice was invalid. It also sought a permanent injunction restraining the appellant from having recourse to the bank guarantees.

12 By summons dated 12 August 2014, the respondent applied for an interlocutory injunction to restrain the appellant from having recourse to the bank guarantees. The application was heard on 29 August 2014 and the injunction was granted on 24 September 2014. The primary judge restrained the appellant from having recourse to the bank guarantees before the trial of the action or further order.

13 On return of the summons seeking an injunction, the respondent contended in the first instance that the appellant had no entitlement under the contract to seek recourse to the bank guarantees, amongst other things because it was not acting reasonably in claiming to be so entitled as GC 5.2 requires. It further contended that the appellant's recourse notice was invalid and that should the appellant have recourse to the bank guarantees, the respondent would suffer significant commercial and reputational damage in the building industry.

14 In turn, the appellant submitted in the first instance that the primary judge should construe and finally determine the meaning of GC 5.2, and that, upon its proper construction, the claim to the bank guarantees fell within GC 5.2 because the appellant was in the relevant sense acting reasonably in making that claim.

15 The respondent did not submit to the primary judge that the Court should not construe GC 5.2 but simply joined issue as to its application in the circumstances of the case. In effect, it treated the question of whether the appellant had acted reasonably as a question of fact.

16 Ultimately, the primary judge declined to construe GC 5.2 and, in particular, the meaning of the phrase 'acting reasonably'. His Honour further concluded that he should proceed on the basis that the construction of that condition raised a serious issue to be tried at a future date. It is with this threshold decision that our judgment is concerned.

17 His Honour reached the conclusion that he should not construe GC 5.2 in reliance upon the following considerations:

(a) the difficulties raised by the construction question;

(b) the general importance of the form of contract utilised by the parties and the 'potential for ongoing precedent effect' of a final construction of GC 5.2;

(c) the limited time available to the Court; and

(d) the degree of hardship arising from the scale of the monetary sums involved.[2]

18 Although it cannot be said that it is always the duty of a court on an interlocutory application to decide a question of law upon which the decision of the case depends,[3] more often than not performance bonds stand in a separate category. In our view, his Honour's reasoning demonstrates that he did not give adequate weight to the essential character and evident commercial purpose of GC 5.2 as agreed by the parties. Conversely, on examination, the circumstances identified by his Honour are of insufficient weight to justify postponement of the question of construction. Furthermore, it was necessary to construe GC 5.2 in order to identify the criteria by reference to which to assess the respondent's submission that on the facts the appellant had no entitlement under the contract to seek recourse to the bank guarantees.

19 In Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd,[4] Charles and Callaway JJA addressed the commercial purposes of contractual provisions of the type in issue.

There are broadly two reasons why the beneficiary may have stipulated for a guarantee. One is to provide security. If it has a valid claim and there are difficulties about recovering from the party in default, it has recourse against the bank. The second reason, which is additional to the first, is to allocate the risk as to who shall be out of pocket pending resolution of a dispute. The beneficiary is then able to call upon the guarantee even if it turns out, in the end, that the other party was not in default.[5] 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. 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.[6]

21 If a provision in a building contract requiring a performance bond is intended to operate as a risk allocation device pending the final determination of the dispute between the parties then that intention must be fundamental to a consideration of the justice of an application made to restrain recourse to such a bond pending final determination of the dispute.

22 Charles JA identified the relevant issue of construction as follows:

The critical question which this court must decide is whether the relevant commercial purpose of the agreement was to provide security to Varnsdorf, so that a valid claim to damages (whether or not Time Damages) would be secured or whether clauses such as 3.13 made provision for an allocation of the risk between Fletcher and Varnsdorf - showing which party was to be out of pocket pending resolution of any dispute. If the contractual intention of the parties was the first of these alternatives, cl. 3.13 would give Varnsdorf no authority to call on the letters of credit pending resolution of any dispute. On the other hand, if the second alternative were to be preferred, a question would remain whether there was any relevant qualification or prohibition affecting Varnsdorf's ability now to call on the security. In my view the terms of the agreement show that the commercial purpose of this agreement was to provide an allocation of risk and that Varnsdorf is entitled, under cl. 3.13, to call on the security provided by Fletcher notwithstanding that there is a genuine dispute and a serious issue to be tried as to whether Handover has been reached.[7]

23 Fletcher[8] was considered and applied by the Full Court of the Federal Court in Clough Engineering Ltd v Oil & Natural Gas Corporation Ltd [No 3].[9] The Court accepted that the commercial context of provisions of the type in issue must inform their construction. In turn, a critical question of construction is whether the provision is intended to allocate risk prior to the final determination of rights. In this regard, the Court said:[10]

... 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.[11]

24 In Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd,[12] the New South Wales Court of Appeal considered the decision in Clough.[13] Although Macfarlan JA, with whom Campbell JA agreed, doubted the correctness of the decision in Clough on the facts,[14] he did not doubt that a performance bond may be intended to serve both of the purposes identified in Fletcher.[15]

25 The fact that a performance bond is intended to operate as a risk allocation device is not, of course, necessarily determinative of the right of a party to have recourse to it. It may be subject to a contractual qualification or limitation upon the circumstances in which recourse may be had. Nevertheless, the fundamental characteristic of a risk allocation device informs the task which the Court must undertake in resolving whether or not to grant an injunction.

26 The primary judge recognised that the relevant contractual provision in the present case might have one or both of the purposes postulated in Fletcher.[16] His Honour also recognised that the Court should not readily favour a construction which erodes or frustrates the commercial purpose of the provision of a security.[17] He ultimately put the construction issues in the present case as follows:

Looking at the contract as a whole, the question becomes whether the provision of the bank guarantee was merely for the purpose of provision of security or was a risk allocation device as between the parties pending resolution of a dispute, or had both of these purposes. The specific question of construction, to be determined amongst other things in the light of the purpose or purposes found, is whether, the contract confers an unfettered right to call upon the performance guarantee or whether exercise of the right is limited by some, and if so what, consideration or body of considerations.[18]

27 He further referred to the statement of the Full Federal Court in Clough:

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. [19]

28 The primary judge correctly encapsulated the principles governing the construction issues raised by the application before him but the obvious question raised by these principles is whether his Honour should have gone on to construe GC 5.2 in order to resolve first, whether the contractual provisions were intended to operate as a risk allocation device and secondly, what was the nature of the qualification imposed upon recourse to it by GC 5.2.

29 We respectfully agree with the view expressed by Charles and Callaway JJA in Fletcher[20] that in the first instance in a case such as the present the Court must ask whether the performance bond is intended to allocate risk pending the final determination of the parties' rights. If GC 5.2 is intended to operate in part as a risk allocation provision, the failure to resolve its construction until trial renders it effectively nugatory in this respect and defeats its evident commercial purpose. In substance, it deprives the parties of the commercial bargain that they made. The consequence of the grant of an injunction restraining recourse to a performance bond pending trial in these circumstances is that it will in effect amount to final relief in respect of a principal benefit intended to be conveyed by the performance bond. It is well recognised that where an injunction in effect grants final relief that consequence must bear upon the fundamental question of whether the grant or refusal of the injunction carries with it the lower risk of injustice.

30 In this sense, consideration of the commercial purpose of the performance bond in issue squarely reflects the application of the general principles governing the enforcement by injunction of negative stipulations within contracts. After identifying the construction issue in the terms which we have quoted above, the primary judge went on to say:

It follows that if a party in whose favour a bank guarantee has been given has bound itself to a contractual fetter or qualification under which that party promises not to call upon the guarantee in the circumstances defined, breach of that contractual promise, or a threatened breach, may be enjoined by applying the usual principles relating to the enforcement by injunction of negative stipulations in contracts.[21]

31 Whilst it may be accepted that the usual principles governing interlocutory injunctions fell to be applied in the present case, it must also be accepted that they fell to be applied in respect of an unusual form of contract, if it be the case that the commercial purpose of the performance bond was to allocate risk pending final determination of the dispute. Such a contractual provision fundamentally alters the context in which the Court must exercise its discretion by changing the complexion of the status quo and raising the prospect of substantial injustice if the purpose of the provision is defeated. That is, the status quo in such circumstances becomes what the parties have agreed as to which of them should bear the financial risk pending final determination, not the continuation of where that risk would naturally fall in the absence of a performance bond to call upon.

32 The context in which an injunction is sought will govern the extent to which a plaintiff must make out its case in order to obtain relief. In Magna Alloys and Research Pty Ltd v Coffey[22] the Full Court of this Court adopted the following passage from the judgment of Lush J in Slater Walker Superannuation Pty Ltd v Great Boulder Gold Mines Ltd[23]:

The weight to be given to the various considerations shown by the authorities to be relevant will vary from case to case ... There will be situations in which the plaintiff cannot expect to be granted an injunction unless he can show that he can prove positively the existence of his rights and the infringement of them. There will be other situations in which though the plaintiff's proof of his rights or the infringement of them is not strong, an injunction may be granted because to withhold it would do the plaintiff irreparable harm, while to grant it would not greatly injure the defendant. The possible variety of situations is unlimited.[24]

33 If the grant of injunctive relief is effectively dispositive of a material part of the claim the plaintiff must confront a heavy onus. In NWL v Woods, Lord Diplock said that where:

... the grant or refusal of the interlocutory injunction will have the practical effect of putting an end to the action because the harm that will have been already caused to the losing party by its grant or its refusal is complete and of a kind for which money cannot constitute any worthwhile recompense, the degree of likelihood that the plaintiff would have succeeded in establishing his right to an injunction if the action had gone to trial, is a factor to be brought into the balance by the judge in weighing the risks that injustice may result from his deciding the application one way rather than the other.[25]

34 If the commercial purpose of a contractual provision is defeated that must bear squarely on the ultimate risk of injustice inherent in the grant of an injunction. In Bradto Pty Ltd v State of Victoria,[26] the Court of Appeal constituted by Maxwell P and Charles JA applied the following statement of fundamental principle by Hoffman J in Films Rover International Ltd v Cannon Films Sales Ltd:

... The principal dilemma about the grant of interlocutory injunctions, whether prohibitory or mandatory, is that there is by definition a risk that the court may make the 'wrong' decision, in the sense of granting an injunction to a party who fails to establish his right at the trial (or would fail if there was a trial) or alternatively, in failing to grant an injunction to a party who succeeds (or would succeed) at trial. A fundamental principle is therefore that the court should take whichever course appears to carry the lower risk of injustice if it should turn out to have been 'wrong' in the sense I have described ...[27]

35 When each of the above statements of underlying principle is applied to the facts of the present case it supports the conclusion that the question of whether GC 5.2 was intended in part to effect risk allocation pending resolution of a dispute must necessarily bear upon the justice or injustice of the injunction sought. The interlocutory relief sought had the capacity to amount to final relief in the sense of completely defeating the commercial purpose of risk allocation prior to the final determination of the matter.

36 It follows that both basic principle and the specific authority of the decision in Fletcher[28] supported the conclusion that the judge at first instance and this Court on appeal must consider whether GC 5.2 was intended to effect an allocation of risk pending resolution of the dispute between the parties.

37 The qualification imposed by GC 5.2 upon recourse to the performance bonds relevantly required only that a claim be made by the appellant acting reasonably, not that it ultimately be judged objectively valid.

38 In turn, the condition allocated to the respondent the risk that such a claim might not ultimately be sustained against the respondent. If the evident commercial purpose of the provision was to be given effect, the judge was bound to construe it at least on a provisional basis. If he did not, then the risk allocation purpose of the clause was potentially defeated.

The need to construe the clause in order to assess the evidence

39 The respondent identifies two construction questions arising in relation to GC 5.2. The first is that to which we have already referred, namely, the meaning of the phrase 'acting reasonably'. The appellant contends that this involved a subjective concept, whereas the respondent contends that it establishes an objective requirement.

40 The second question is whether GC 5.2 only permits the appellant to have recourse to the performance bonds for reimbursement of moneys presently due or expended by the appellant or whether, on the other hand, recourse might be had in respect of moneys payable in the future.

41 The primary judge explicitly recognised the significance of the first of the construction issues to the exercise of the Court's discretion:

Whether there is a serious issue to be tried as to whether Sugar Australia has an entitlement under clause 5.2 of the Construction Contract to seek recourse to the Bank Guarantees in the circumstances advanced by Lend Lease, will in significant part depend upon the proper construction of the words 'acting reasonably' found in the clause, and in particular, whether these words are confined to a subjective analysis, or import the concept of an objective assessment.[29]

42 His Honour was correct to so conclude and this consideration also strongly supported the conclusion that the words 'acting reasonably' should be construed for the purpose of deciding whether injunctive relief was appropriate. Without so doing, the question of whether there was a serious question to be tried on the facts as to whether the appellant was entitled to seek recourse to the bank guarantees could not be determined.

43 The practice adopted in the reported cases relating to performance bonds to which the primary judge was referred in argument also supports the view that it is ordinarily appropriate to resolve construction issues which are capable of resolution at the interlocutory stage and which bear squarely on the justice of preventing reliance upon a performance bond pending trial.

44 It was submitted to the primary judge on behalf of the appellant that a central issue in the proceeding was the construction of the relevant contract and that because this did not depend upon the assessment of evidence but was confined to an examination of the four corners of the document, the Court was obliged to finally determine the construction question at this stage of the proceeding.[30]

45 That submission placed reliance upon the dissenting decision of Young JA in Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd.[31] In that case, the majority overturned the grant of an interlocutory injunction because the primary judge misconstrued a contractual condition governing recourse to a performance bond.[32] Further, it was in this context that Young JA made the following statement:

The first is that when there is an application for an interlocutory injunction which depends on the construction of a contract, it is for the judge to determine whether he or she has sufficient material to be able to construe the contract on a final basis. The urgency with which the case has to be heard, or the lack of factual investigation to that point, may mean that the judge deals with the question of whether there is an arguable case on flimsy material. However, where the question of construction can be dealt with, then the decision on that matter is a final determination, and ordinarily, if no other remedy is given, a declaration should be made as to the construction of the contract.[33]

46 Whilst the primary judge was correct to conclude first that this statement was obiter, and secondly, that it cannot be understood as stating an inflexible rule, the approach of all three judges in the case demonstrates the centrality of the construction of the contract in disputes over breach of negative conditions qualifying performance bonds and the necessity, in the ordinary course, to resolve construction issues of the type here in issue.

47 Reference was also made to Fletcher[34] itself in which a subsidiary issue of contractual construction also arose. In that case, a builder gave standby letters of credit to an owner to secure performance under a building contract. The contract provided that if the builder did not complete by a certain date, the owner was entitled to 'time damages'. Upon failure by the builder to complete by the date specified, the owner gave notice of its intention to claim time damages and draw on the letters of credit. The builder sought an injunction restraining recourse to the letters of credit contending that on the proper construction of the contract, resort to the security was subject to the qualification that the claim to time damages be undisputed.

48 In the present case, the appellant placed specific reliance upon the following statement by Charles JA:[35]

Mr Archibald's submission [made on behalf of Fletcher] on this first issue was that the terms of the agreement, properly construed, show that resort to the security under cl. 3.13 is subject to the express qualification that Varnsdorf's entitlement must be undisputed. This qualification was not said to be implied or inferred. I did not understand it to be suggested that the determination of this point of law required the examination of a factual matrix not presently available. Accordingly this court should, in my view, now decide the question of law involved in the interpretation of the contract.[36]

49 Charles JA referred, in turn, to the decision of Young J in Hortico[37], a case concerning an application for an interlocutory injunction restraining enforcement of a performance bond given by an owner with respect to payment for the design, supply and installation of a boiler. A central issue in that case was whether the bank guarantee in issue was independent of the works contract. Young J said:

On an application for interlocutory injunction which raises questions of law, the approach of this Court has been, I believe, to decide questions of law which arise unless in the opinion of the judge, those questions should be better left until later.[38] I think that the only exceptions to that general rule are where time does not permit proper consideration of the questions of law at the interlocutory stage,[39] or where the determination of the points of law requires a factual matrix which is not available until the facts in the entire proceedings have been proved.

Accordingly, although some of the issues in this case such as whether time is of the essence of the contract and who breached the contract may involve facts which are not yet available and should not be decided at this stage, the basic legal issues in the case can and should be decided now. These issues are whether the 'guarantee' given by the bank should be read independently of the contract or as part of the contractual arrangements between the parties.[40]

50 Having considered the authorities referred to immediately above, the primary judge reasoned as follows:[41]

Both the decision of Charles JA in Fletcher and that of Young J in Hortico in the passages referred to reinforce the view that, however desirable the final determination of a contractual construction issue in a contested proceeding at the stage of an interlocutory injunction application may be, the adoption of this approach is not mandatory nor is it axiomatic. It will depend on the particular circumstances of the case and the exercise of the discretion of the Court after weighing relevant factors.

Spry makes an observation to similar effect in the following passage:

Likewise where there is, not a conflict in the evidence as to matters of fact, but rather a dispute as to questions of law, the preparedness of the court to determine those questions depends on their difficulty and on the balance of convenience, regard being had both to the consequences of granting or refusing relief and also to the other relevant circumstances. Even where in a particular case the court is not disposed to decide a difficult question of law on an interlocutory application it is often found that the risk of injury to the plaintiff is such that interlocutory relief should be granted.[42]

51 It is plainly true that the appropriateness of the ordinary approach identified by Young J in Hortico[43] must ultimately be governed by the circumstances of the case. Nevertheless, the authorities referred to exemplify the application of that approach in cases such as the present.

52 The further decisions of Bachmann Pty Ltd v BHP Power New Zealand Ltd,[44] Clough,[45] FMT Aircraft Gate Support Systems v Sydney Ports Corporation,[46] Redline Contracting Pty Ltd v MCC Mining (Western Australia) Pty Ltd[47] and Otter Group Pty Ltd v Maria Margaretha Wylaars[48] to which reference was made in submissions also reflect the centrality of construction issues to the resolution of applications for interlocutory relief with respect to performance bonds.

53 In our view, when all of these authorities are referred to it is plain that the ordinary practice in a case such as the present is to construe contractual terms which bear on basic issues in the case and which are capable of construction in the absence of further evidence. This practice also favours the conclusion that the contractual provisions here in issue should have been construed by the primary judge.

54 In the present case, both the question whether GC 5.2 was intended to allocate risk in the sense that we have explained and the question of the meaning of the words 'acting reasonably' found within GC 5.2 were basic legal issues which could and should have been decided.

55 The ordinary course adopted in the authorities referred to also conforms with the overarching purpose stated in s 7 of the Civil Procedure Act 2010, namely, to facilitate the just, efficient, timely and cost effective resolution of the real issues in dispute between the parties.

56 Nevertheless, it must of course be accepted that the particular circumstances of a case may dictate a departure from the ordinary practice. We turn now to the circumstances which the judge found determinative of the issue.

Was the proper construction of the contract best left to the trial of the proceeding?

57 His Honour concluded that the proper construction of the contract was best left to the trial of the proceeding for a final determination. That decision was discretionary. As the High Court put it in Cohen v Peko-Wallsend Ltd:

It is not right to say that it is always the duty of the court on an interlocutory application to decide a question of law upon which the decision of the case depends. No doubt if the question is one susceptible of resolution without further evidence, and the urgency of the matter does not render it impracticable to give proper consideration to the question, the desirable course will be to decide it.

Ultimately, however, the course which the court takes lies within its discretion. [49]

58 Not only was his Honour's decision a discretionary one,[50] it was based upon multifactorial considerations, each of which required judgments of fact and degree. Further, insofar as those judgments raised case management issues, those issues fell to be considered in the context of broader considerations entitling the judge to make judgments as to the overall allocation of time and resources within a specialist list of this Court.

59 The Court of Appeal will not lightly interfere with a judgment made on the basis of considerations of this kind. There is a presumption on appeal that the decision appealed from is correct and the decision should only be set aside if the Court of Appeal is satisfied that it involves a clear error.[51] Nevertheless, in the present case the matters ultimately identified by his Honour as founding his judgment could not properly be regarded as outweighing the factors we have already identified, which favoured construction of the relevant contractual provisions.

60 The primary judge concluded first that the issues of construction raised difficulty and there was no authority directly on point. Whilst the contractual provision in question was novel, the critical phrases in issue were limited ones utilising concepts well known to the law. They did not raise issues of unusual difficulty or depend upon aspects of surrounding factual circumstances.

61 Next, his Honour noted that the clause in issue, GC 5.2, utilised a modified version of the general conditions of contract AS4910-2002 for the supply of equipment with installation. Whilst it may be accepted that the clause was based on a standard form contract, the construction issues arose because in the form adopted it was a bespoke clause. The words which required construction had been adopted by the parties for the purposes of this particular contract. The questions of construction did not raise issues of general practice and importance.

62 Next, his Honour concluded that the limited time available to the Court would not enable careful reflection. It was open to his Honour to take some time in resolving the question. An extended interim injunction might have been granted pending that resolution. Indeed, the primary judge reserved his decision for five weeks and gave detailed reasons for his conclusions. We do not accept that time considerations could be regarded as being materially determinative of the issue in question.

63 Lastly, his Honour took the view that a final determination at this stage of the proceeding may give rise to a degree of hardship arising from the scale of the monetary sums involved. For the reasons we have explained, the nature of that hardship could not properly be assessed without determining whether the contractual provision was intended to allocate risk pending the final determination of the dispute between the parties.

64 The matters identified by his Honour do not outweigh the considerations which favoured the adoption of the ordinary practice in such matters.

65 It follows that his Honour was incorrect to put off the question of construction of the contract until the trial of the proceeding and to regard the issues which arose with respect to construction as giving rise to a serious issue which should be tried subsequently.

66 For completeness, we note that in expressing his conclusions his Honour said that it was appropriate to reserve the construction question to a final determination at the trial of the proceeding, or at least to the trial of a separate question, pursuant to r 47.04 of the Supreme Court (General Civil Procedure) Rules 2005 if such were ordered on an application made on proper notice. The postulation of an alternative procedure does not resolve the problems with his Honour's conclusions. In terms, he put off the construction questions to the trial and for the reasons we have explained this was not appropriate. Further, the trial of a separate question would not provide an appropriate vehicle for the resolution of interrelated issues arising upon the injunction application.

67 The primary judge did not decide whether GC 5.2 was intended to allocate risk pending the resolution of a dispute. In our view it was so intended and this in turn constitutes a consideration of fundamental importance in assessing whether the grant of an injunction carries with it the lower risk of injustice.

68 The parties made a commercial agreement as to when and how the performance bonds might be called upon. In doing so, they effectively determined which of them would bear the financial risk (up to approximately $4.2 million) without the need for the appellant to prove an entitlement to be paid. The safeguard negotiated and agreed by the parties was that the appellant must act reasonably when claiming an entitlement to payment and calling on the bonds. One important commercial effect of this was that the appellant did not have to wait until trial for payment of some amount by the respondent. This evident commercial purpose of GC 5.2, when viewed in the context of the accepted principles governing the grant of

interlocutory injunctions and the ordinary practice adopted in performance bond cases, required the primary judge to resolve the construction issues raised in order to properly determine whether an injunction should be granted. If this were not done, in effect, the parties would be deprived of the commercial bargain that they made.

69 We are in agreement with Kaye JA with respect to the remaining issues which arise on the appeal and with the order he proposes.

70 This is an appeal from the decision of a judge of the trial division to grant an interlocutory injunction restraining the appellant from seeking recourse to two bank guarantees provided by the respondent to the appellant.

71 On 20 June 2007, the appellant and the respondent entered into an agreement for the design, construction, supply and installation by the respondent of equipment for a new refined sugar station as part of an upgrade at the appellant's existing facility in Yarraville. The initial contract sum was $41,900,000, and it was adjusted to $42,485,189 (excluding GST).

The contract was wholly in writing and was constituted by documents described in a Formal Instrument of Agreement dated 20 June 2007. That agreement specifically incorporated (inter alia) an amended version of the General Conditions of AS 4910 2002 (referred to as 'the GCs'). The contract contained terms requiring the respondent (inter alia) to design and construct the works in a proper and workmanlike manner under adequate and competent supervision, to complete the works in accordance with the contract and any authorised directions to the satisfaction of the Agreed Acceptance Testing Performance criteria, and to bring the works to practical completion by the date for practical completion, being 7 November 2008, subject to extensions of time by the principal's representative. The

contract also contained a term requiring the respondent to pay liquidated damages, if it failed to achieve practical completion by the specified date (as adjusted).

72 GC 43.1(c) of the contract provided that the total liability of the respondent, arising in connection with the subject matter of the contract, for a claim for rectification, was limited as follows:

...

(iv) For a liability arising in connection with a breach of the contractor's professional duties, including without limitation of failure to design the works in accordance with the contract (whether such failure was negligent or otherwise) - $15,000,000;

...

(vi) Other than for events in relation to clause 43.1(c)(v), for a liability arising from a claim relating to an indemnity or loss for which the contractor is not required to have effected insurance cover under the contract 10% of the contract sum in the aggregate as adjusted in accordance with the contract. The parties acknowledge that this limitation includes the levying of liquidated damages by the principal under the contract.

This limitation shall continue to apply notwithstanding fundamental breach, breach of a fundamental term, rescission, repudiation or termination for any reason or frustration, with unintentional or by operation of law.

Notwithstanding any other provision of this contract, neither the Principal nor the Contractor shall be liable to the other for any consequential, indirect or special loss or damage, including limitation loss of profit or loss of revenue, or loss of use of the works howsoever arising.

73 Pursuant to GC 5.1, and Items 14(a) and 14(b) of Annexure Part A, of the contract, the respondent was required to provide the appellant with security in the form of two unconditional bank guarantees from BNP Paribas ('the bank'). Each guarantee was to be for an amount representing 5% of the original contract sum, being $2,095,000 (that is, $4,190,000 in aggregate).

74 Under Item 14(b) of Annexure Part A, the respondent was required to provide security in accordance with the form and terms of the pro forma 'unconditional undertaking' contained in Annexure Part B. That undertaking was to provide that the bank:

... unconditionally undertakes to pay on demand any sum or sums which may from time to time be demanded by (the appellant) ...

... it is unconditionally agreed that the Bank will make the payment or payments to the principal forthwith without reference to (the respondent) and notwithstanding any notice given by (the respondent) to the bank not to pay same.

75 In accordance with its obligations under GC 5.1, Item 14(a) and (b), and Annexure Part B to the contract, the respondent provided two unconditional undertakings dated 26 June 2007, each for the amount of $2,095,000.

76 GC 5.2 was central to the decision of the primary judge, and to the matters agitated on appeal. It was entitled 'availability of security', and provides as follows:

Any security provided by the Contractor in accordance with the Contract shall be available to the Principal whenever the Principal may claim (acting reasonably) to be entitled to:

(i) the payment of monies or an indemnity by the Contractor under or in consequence of or in connection with the Contract;

(ii) reimbursement of any monies paid to others under or in connection with the Contract; or

(iii) other monies payable by the Contractor to the Principal (whether by way of set off or otherwise).

Recourse to security shall only be subject to the Principal having given the Contractor five days' notice of its intention to have recourse to the security for the purpose of allowing the Contractor to replace the security with cash where it has been issued in a form other than cash. Where the Principal has recourse to security in accordance with clause 37.3, the Contractor shall provide replacement security in accordance with clause 37.3.

77 Under the contract, in the event that the respondent failed to achieve practical completion by the due date, liquidated damages were payable by the respondent at the rate of $8,000 per day. The contract imposed a cap of 5% of the contract sum (that is, $2,095,000) on the maximum amount of liquidated damages payable by the respondent to the appellant for failure to reach practical completion by the due date. In March 2008, the principal's representative extended the date for practical completion to 27 February 2009. The respondent did not achieve practical completion by that date, or before the purported termination of the contract by the respondent on 28 September 2011, or before the purported termination of the contract by the appellant on 3 November 2011. Prior to the latter two dates, liquidated damages had been certified by the principal's representative, against payments otherwise due to the respondent, up to the capped limit of $2,095,000. After taking into account liquidated damages, and a deduction of $120,000 for negative variations, the balance of the liability cap under GC 43.1(c)(vi) was the sum of $2,024,215.

78 On 17 May 2011, the principal's representative issued a direction to the respondent, under GC 49.2, purporting to prohibit the respondent from energising systems without first obtaining a permit to work from the appellant ('the 17 May 2011 direction'). On 19 May, the respondent issued a notice to the appellant of alleged breaches of the contract concerning the conduct of the principal's representative. On the next day, 20 May, the principal's representative issued a direction to the respondent requiring it to remove certain specified personnel from the site by reason of their alleged failure to conform with the 17 May direction ('the 20 May direction').

79 On 31 May, the respondent gave the appellant a Notice to Show Cause, under GC 39.8. That notice alleged substantial breaches by the appellant in relation to the 17 May and 20 May 2011 directions, by the failure of the appellant to ensure that the principal's representative acted reasonably and in good faith, in relation to those directions, and by failing to make proper assessments in relation to variations and negative variations. The appellant responded to that Show Cause Notice on 8 June. In turn, the respondent, by notice dated 16 June, suspended the works under GC 39.9 of the contract, on the basis that the appellant had not shown cause in relation to the alleged substantial breaches specified in the respondent's Show Cause Notice dated 31 May 2011.

80 By letter dated 13 July 2011, the principal's representative purported to withdraw the 17 May direction and the 20 May direction, under cover of objection that he was not obliged to do so. Similarly, by letter dated 13 July 2011 the appellant, by its solicitors, also purported to withdraw the 17 May direction and the 20 May direction, under cover of objection that the appellant was not obliged to do so.

81 The respondent continued to suspend the works on and from 13 July 2011. On 23 August, the appellant issued a Show Cause Notice to the respondent in relation to alleged substantial breaches under GC 39 of the contract. The notice alleged breaches consisting of the respondent's failure to bring the works to practical completion by 27 February 2009, the respondent's continued wrongful suspension of the works, the respondent's defective works, and the failure of the respondent to provide other specified evidence of insurances and to provide other specified documents prior to commissioning.

82 By written notice dated 28 September 2011, the respondent purported to terminate the contract under GC 39.9. On 29 September, the respondent replied in writing to the appellant's Show Cause Notice, disputing that it was in substantial breach, and contending that the appellant was not entitled to terminate the contract. By notice in writing dated 3 November 2011, the appellant purported to terminate the contract under GC 39.4(b).

83 On 8 August 2014, the appellant gave written notice to the respondent of its intention to have recourse to the unconditional undertakings under GC 5.2. The notice summarised claims by the appellant for the additional cost to complete the works, and the costs of rectifying defective works, totalling $9,903,365.93. The notice was undated, and it (incorrectly) named the relevant recipient as 'Lend Lease Services (Australia) Pty Ltd' instead of 'Lend Lease Services Pty Ltd'. It provided the respondent with the option of providing cash in lieu of the unconditional undertakings in conformity with GC 5.2.

84 On the same day, 8 August 2014, the appellant commenced proceeding number SECI 2014 000041 in the Technology Engineering and Construction List of the Court. By further particulars provided in the proceeding, it claims damages totalling $9,443,291, consisting of the following:

(a) Increased costs of completing the works $2,744,062.

(b) Incurred costs of rectifying defects (as at 8 August 2014) $1,428,352.

(c) Estimated costs of rectifying further defects $5,270,877.

85 On 12 August, the respondent commenced its own proceeding in this Court, before it became aware of the appellant's proceeding. In the general endorsement to its writ, the respondent claims that the appellant failed to ensure that the principal's representative fulfilled all aspects of his role and functions reasonably and in good faith, and that the respondent accordingly validly terminated the contract on 28 September 2011. The respondent claims payments totalling $17,904,746 in respect of (inter alia) variations, reversal of negative variations, unpaid progress certificates, and balance of earned contract sum and delayed costs. It also claims project losses, calculated on a quantum meruit basis, totalling $67,171,483.50. In addition, the respondent claims declarations that the appellant wrongfully purported to issue the recourse notice, and that the recourse notice was invalid, and it seeks a permanent injunction restraining the appellant from having recourse to the unconditional undertakings.

86 By summons dated 12 August 2014, the respondent made application for an interlocutory injunction to restrain the appellant from having recourse to the unconditional undertakings. That application was heard on 29 August. On 24 September, the judge delivered his reasons. His Honour granted the respondent an interlocutory injunction, restraining the appellant from having recourse to the unconditional undertakings before the trial of the action or further order.

87 The judge commenced his reasons[52] by noting that the respondent's basic contentions, on the application, were that: the appellant had no entitlement under the construction contract to seek recourse to the bank guarantees; the appellant's notice of recourse dated 8 August 2014 was invalid; and, should the appellant have recourse to the bank guarantees, the respondent would suffer significant commercial damage and injury to its reputation in the building industry.

88 In respect of the first contention, the judge considered the submission, made on behalf of the appellant, that he should finally determine the question of the correct construction of GC 5.2. He referred to the cases relied on by the appellant in support of that proposition, including the judgment of Young JA in Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd,[53] the judgment of Charles JA in Fletcher Construction Australia Pty Ltd v Varnsdorf Pty Ltd,[54] and the judgment of Young J in Hortico (Aust) v Energy Equipment Co (Aust) Pty Ltd.[55] His Honour considered that the proper construction of the contract, and in particular clause 5.2, was best left to the trial of the proceeding for a final determination. He noted that the standard form conditions, incorporated in the contract, are in general use in the engineering and construction industry, and that any final determination of the construction of the clause would have a 'potential for ongoing precedent effect'.[56] The construction issue called for careful reflection. The limited time available to the court, together with the consequences to the parties of a final determination at that stage, were factors which should be taken into account. Accordingly, his Honour concluded that the construction question should be reserved to the trial of the proceeding, or at least to the trial of a separate question pursuant to r 47.04 of the Supreme Court (General Civil Procedure) Rules 2005.

89 The judge then noted that the commercial purposes of security provisions, involving the provision of a bank guarantee are, first, to provide security to the holder by enabling recourse against the third party bank, and, secondly, to allocate the risk as to which party should be out of pocket pending resolution of any dispute that may arise. Thus, clear words would be required to support a construction that inhibited a beneficiary from calling on a performance guarantee. Nevertheless, if a party in whose favour a bank guarantee has been given, has bound itself to a contractual fetter or qualification in relation to the recourse to that guarantee, breach of that qualification or fetter may be enjoined by applying the usual principles relating to the enforcement by injunction of negative stipulations in contracts.

90 The judge then noted the competing submissions by the parties as to the correct construction of clause 5.2. In particular, the appellant contended that the words 'acting reasonably' involved a solely subjective element to be determined by reference to the motive of the beneficiary from making the claim for the payment. Thus, the words 'acting reasonably', it was contended, only required the appellant to demonstrate it had a bona fide arguable claim for an amount equal to or in excess of the amount of the security. Alternatively, it was put by the appellant that if the phrase 'acting reasonably' involved an objective element, the respondent would need to establish that no reasonable person in the position of the appellant would have formed the view that it had a claim to be entitled to the payment.

91 The judge noted that, in response, the respondent had submitted that the appellant was not 'acting reasonably' in seeking recourse, given that: the respondent contended that it had no indebtedness to the appellant; the respondent had claims against the appellant that far exceeded the value of the claims by the appellant against the respondent; and the respondent had the benefit of a liability cap (clause 43) under the construction contract.

92 Having summarised those submissions, and set out the relevant terms of the agreement, the judge concluded that the question, whether there was a serious issue to be tried as to whether the appellant had entitlement under clause 5.2 to seek recourse to the bank guarantees, would depend upon the proper construction of the words 'acting reasonably'. His Honour was satisfied that there was a serious issue to be tried as to at least two matters in relation to clause 5.2, namely:

(a) The correct construction of clause 5.2; and

(b) Whether, if the words 'acting reasonably' involved an objective analysis, the matters raised by the respondent had the effect that the appellant was not acting reasonably by seeking to call upon the bank guarantees.

93 The judge also was satisfied that the respondent had demonstrated a serious issue to be tried, in relation to the validity of the recourse notice, for three reasons:

(a) The notice was not addressed to the respondent, but rather to a non-existent entity (Lend Lease Services (Aust) Pty Ltd).

(b) On a proper construction of clause 5.2 of the contract, a call could only be made for payment or reimbursement of monies presently due, rather than for monies which may become due in the future. Only two of the items claimed in the recourse notice were for reimbursement of monies that had been expended by the appellant.

(c) The notice seeks to draw a sum greater than the available balance of a liability cap ($2,024,215).

94 The judge further considered that if no injunction were granted, but the claims of the respondent were ultimately vindicated, it would in all likelihood suffer irreparable harm, for which an award of damages would not be an adequate remedy. His Honour reached that conclusion on the basis that the appellant has a paid up capital of $4, it does not own the land on which the project is being constructed, and neither of the two companies that own its shares are guarantors of its obligations. His Honour also accepted that the respondent would suffer damage to its reputation should the bank guarantees be drawn on.

95 Accordingly, the judge was satisfied that the balance of convenience strongly favoured the grant of the injunction. His Honour reached that conclusion because the respondent would suffer damage to its reputation should the appellant enforce the bank guarantees, secondly, because there was an appreciable risk that the appellant would not be able to satisfy an award of damages, and, thirdly, in comparison, the judge was not satisfied that it was likely to be more than minimal inconvenience to the appellant should it be restrained from acting on the recourse notice pending the trial of the proceeding.

96 The appellant submitted that the judge erred in concluding that there was a serious issue to be tried as to the right of the appellant to call upon the bank guarantees pursuant to the recourse notice dated 8 August 2014. In support of that submission, it contended that the judge erred in declining to construe GC 5.2. Counsel submitted that, on a proper analysis of the authorities, a judge is obliged, on the hearing of an application for an interlocutory injunction, to decide questions of law, such as those involved in the construction of GC 5.2. In particular, the judge failed to take into account that the construction of clause 5.2 was a critical issue, and that it was unlikely to be difficult or consumed in an inordinate amount of time. GC 5.2 was not a standard clause, but was rather a 'bespoke' clause. The decision of the judge, that the clause should be construed at the final hearing of the case, had the effect of depriving the appellant of the benefit of the clause.

97 On the question of a proper construction of GC 5.2, the appellant repeated the submissions that it made before the trial judge, and to which I have referred. In addition, it was submitted that the judge erred in finding that the respondent had established a prima facie case, or a serious issue to be tried, in relation to whether the appellant had satisfied the criteria prescribed in GC 5.2. In particular, the judge erred in failing to make any adequate factual finding in relation to the allegations by the respondent in support of its contention that the appellant did not 'act reasonably' for the purposes of clause 5.2. It was submitted that the judge should have made a provisional analysis of the factual issues agitated by the parties that affected the application of GC 5.2. In particular, it was submitted that the judge effectively disregarded the appellant's case, by failing to consider the evidence as to the defective works, and evidence which (it contended) had the effect that the respondent was unlikely to be successful in establishing that it was entitled to terminate the contract. It was also submitted that the judge failed to make any adequate assessment of the evidence, which demonstrated that the claims asserted by the appellant were not subject to the liability cap prescribed in GC 43.1(c)(vi), but,

rather, were claims for losses attributable to breaches of professional duties, including defective design, within the meaning of GC 43.1(c)(iv).

98 In addition, it was submitted, on behalf of the appellant, that the judge erred in finding there was a serious question to be tried in relation to the validity of the recourse notice. In particular, the judge should have determined that issue, rather than considering, merely, whether there was a serious issue to be tried in relation to it.

99 The appellant further submitted that the respondent had failed to establish that, if the judge did not grant to it the interlocutory injunction, it would suffer irreparable harm. In particular, senior counsel for the appellant submitted that the judge failed to have regard to the undertaking offered by the appellant's parent company, Wilmar Sugar Refining Investments Pty Ltd, to meet any judgment for the return of the security, in the event that it was ultimately found that the appellant was not entitled to have interim recourse. It was further submitted that the judge fell into error in failing to take into account that, at the time it entered into the contract, the respondent knew, or ought to have known, of the appellant's paid up capital and lack of ownership of real estate. Counsel submitted that the judge did no more than refer to the respondent's assertion, that it would suffer damage to its reputation, in the event that the appellant were permitted to rely on the recourse notices. In addition, the respondent knew, or ought to have known, at the time of the entry into the contract, of the potential impact on its reputation, in the event that the appellant would have recourse to the undertakings. Based on those propositions, it was submitted that the judge erred in failing to consider that the balance of convenience weighed against the grant of an injunction to the respondent.

100 In response, it was submitted on behalf of the respondent that the judge did not err in declining to construe clause 5.2 for the purposes of the application for an interlocutory injunction before him. It was submitted that the respondent had received no notice that the appellant sought a determination of clause 5.2 on a final basis, and there had been no suggestion that the appellant would make such a submission to the court before the hearing of the application before the primary judge.

101 Counsel for the respondent further submitted that two construction issues arise in respect of clause 5.2. The first issue was whether the words 'acting reasonably' involved a solely subjective analysis, or imported an objective requirement. The second issue was whether clause 5.2 only permitted the appellant to make a call on the guarantees for payment of reimbursement of money presently due or expended by the appellant, or whether a call might be made in respect of money that might become payable by the respondent in the future. It was submitted that the constructions advanced by the respondent, before the primary judge, were reasonably arguable, and they had a sufficient likelihood of success. The submission by the appellant that the decision of the judge, not to determine the construction of GC 5.2 to the final hearing, deprived the appellant of the value of the clause, must be considered in the context of the failure of the appellant to seek recourse to the guarantees for a period of three years after the contract had been terminated.

102 It was further submitted that a determination of those two construction issues would not have disposed of the proceeding. Two additional serious questions arose, namely, whether the appellant was, in any event, acting reasonably (however construed) by issuing the recourse notice, and whether the recourse notice was valid.

103 It was further submitted that the court should reject the submission by the appellant that there was ample evidence establishing the basis upon which the appellant sought recourse to the bank guarantees. In particular, the respondent had tendered evidence that (it contended) constituted a rebuttal of the alleged defects relied on by the appellant in support of its recourse notice. The respondent also submitted that the court should reject the submission by the appellant that the respondent was unlikely to be successful in establishing that it was entitled to terminate the contract in reliance on its Show Cause Notice and its notice of termination. In particular, it was submitted that the evidence demonstrated that the principal's representative for the project had acted unreasonably, by obstructing the respondent from completing its works, and thus occasioning significant loss and damage to the respondent. In that connection, it was pointed out that the appellant subsequently terminated the principal representative's engagement, and commenced proceedings against his company alleging misleading conduct by the representative.

104 It was further submitted that the contention by the appellant, that its claims were not subject to the liability cap prescribed by clause 43, but were losses attributable to breaches of 'professional duties', constituted a re-characterisation by the appellant of its claims for defective work, by asserting, for the first time, that the alleged defective work arose in connection with breaches of the respondent's professional duties.

105 It was further submitted on behalf of the respondent that the judge did not err in determining that there was a serious issue to be tried in relation to the validity of the recourse notice given under GC 5.2. In respect of the issue of the likelihood of irreparable harm, it was submitted that the undertaking proffered by Wilmar Sugar Refining Investments Pty Ltd was wholly inadequate, in that it was limited to the aggregate amount of the guarantees, and did not cover damage to the respondent's reputation. It was submitted that the judge did not err in accepting the evidence of the respondent as to the likely damage to its reputation, if the injunction was not granted. That evidence was given on affidavit by the group treasurer and the chief operating officer of the respondent.

106 In those circumstances, it was submitted that the judge was correct in determining that the balance of convenience lay in favour of the grant of the injunction.

Legal principles - appeal from grant of interlocutory injunction

107 The decision by a court, to grant or refuse an interlocutory injunction, is, by its nature, the product of the exercise of the court's discretion.[57] There is therefore a presumption, on appeal, that the decision appealed from is correct, and the decision should only be set aside if the Court of Appeal is satisfied that it involves a clear error.[58] As I shall later discuss, the documentation before the primary judge, and before this Court, was voluminous. It is recognised that, in such cases, it is not possible for the court to traverse the facts in detail, or to come to a concluded decision concerning them.[59]

108 The principles, governing the grant of an interlocutory injunction, are not in issue in this case. They require, first, that the applicant must demonstrate that there is a serious issue to be tried as to its entitlement to relief at trial. In order to satisfy that requirement, the applicant must make out a prima facie case as to its entitlement to that relief, in the sense that it must show a sufficient likelihood of success at trial to justify, in the circumstances, the preservation of the status quo pending trial.[60] In addition, the applicant must demonstrate that, if interlocutory relief is not granted, it is likely to suffer injury for which an award of damages would not be an adequate remedy, and that the balance of convenience favours the grant of the injunction.[61]

109 In this case, the appellant has submitted that the judge erred in concluding that the respondent had established each of those three propositions, which were necessary to the grant to it of an interlocutory injunction.

Serious issue to be tried: construction of contract

110 The submissions made on behalf of the appellant, that the judge erred in finding that the respondent had established a serious issue to be tried at the trial of the proceeding, necessarily involved two propositions advanced on behalf of the appellant, namely:

(a) The judge erred in failing to undertake a construction of the relevant clauses of the contract, and, in particular, GC 5.2, and GC 43;

(b) The judge erred in failing to conclude that, on a proper construction of those clauses, the respondent had not established that there was a serious issue to be tried as to the entitlement of the appellant to have recourse to the two bank guarantees provided to it by the respondent.

111 In my view, the authorities to which the primary judge was referred, and which I shall shortly discuss, support the proposition that, ordinarily, on an application for an interlocutory injunction to restrain recourse to a security provided under a building contract, a court should determine a controversial issue of law, if the determination of that issue is a necessary step to a conclusion whether an applicant is entitled to the injunction, unless, in the particular circumstances of the case, it is not practicable or appropriate to do so.

112 Those principles were stated by Young J in Hortico (Australia) Pty Ltd v Energy Equipment Co (Australia) Pty Ltd.[62] In that case, the applicant sought an interlocutory injunction to restrain its bank from paying monies to the beneficiary of a bank performance bond. In refusing that application, Young J rejected the construction of the bank guarantee relied on by the applicant. In doing so, his Honour expressed the applicable principles as follows:

On an application for interlocutory injunction which raises questions of law, the approach of this Court has been, I believe, to decide questions of law which arise unless in the opinion of the judge, those questions should be better left until later ... I think that the only exceptions to that general rule are where time does not permit proper consideration of the questions of law at the interlocutory stage ... or where the determination of the points of law requires a factual matrix which is not available until the facts in the entire proceedings have been proved.[63]

113 That passage, from the judgment of Young J in Hortico, was cited, with approval, by Charles JA in Fletcher Construction Australia Limited v Varnsdorf Pty Ltd.[64] That case concerned an appeal against the refusal of a trial judge to grant an interlocutory injunction restraining recourse by the respondent to standby letters of credit, that had been provided to secure the performance by the appellant of its obligations under a building contract. Charles JA, having referred to a submission advanced on behalf of the appellant, that resort to the security was subject to an express qualification that the respondent's entitlement must be undisputed, stated:

This qualification was not said to be implied or inferred. I did not understand it to be suggested that the determination of this point of law required the examination of a factual matrix not presently available. Accordingly this Court should, in my view, now decide the question of law involved in the interpretation of the contract... If Varnsdorf's argument as to the construction of the agreement is preferred, the fact that a genuine dispute exists as to whether Fletcher has achieved Handover would not, in my view, raise a serious question to be tried on the issue whether Varnsdorf is now entitled to call on the letters of credit.[65]

114 In his concurring judgment, Callaway JA, while not expressly considering the question, nevertheless undertook a construction of the security in question. Batt JA agreed with the reasons given by both Charles JA and Callaway JA.

115 More recently, in Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd,[66] Young JA stated the principles in terms consistent with those that I have already discussed. In that case, the New South Wales Court of Appeal was concerned with an appeal from a refusal by a trial judge to grant an interlocutory injunction to restrain the defendant proprietor from converting unconditional performance bonds given by an insurance company on behalf of the defendant builder. Young JA said:

... when there is an application for an interlocutory injunction which depends on the construction of a contract, it is for the judge to determine whether he or she has sufficient material to be able to construe the contract on a final basis. The urgency with which the case has to be heard, or the lack of factual investigation to that point, may mean that the judge deals with the question of whether there is an arguable case on flimsy material. However, where the question of construction can be dealt with, then the decision on that matter is a final determination, and ordinarily, if no other remedy is given, a declaration should be made as to the construction of the contract.[67]

116 In addition to the cases that I have just mentioned, there are a number of other instances in which the courts have undertaken a final construction of a security clause in a building contract, for the purposes of determining an application for an interlocutory injunction to restrain a building proprietor from having recourse to the security provided by that clause. Those cases include Clough Engineering Ltd v Oil & Natural Gas Corporation Ltd,[68] FMT Aircraft Gate Support Systems v Sydney Ports Corporation,[69] and Redline Contracting Pty Ltd v MCC Mining (Western Australia) Pty Ltd.[70]

117 I do not consider that the recent decision of the Court of Appeal in RSD Chartered Accountants v Bolitho,[71] that was relied on by the respondent, alters or in any way qualifies the principles to which I have just referred. In that case, the court was concerned with an application for leave to appeal against a decision of a primary judge granting leave to the plaintiff to amend its statement of claim. The amendment, so allowed, raised contentious issues as to the correct construction of s 729 of the Corporations Act 2001. The point raised, by the amendment, was a novel point of law, and the court considered that it was inappropriate to dispose of it, finally, on an application for leave to amend a pleading.

118 An application for leave to amend a pleading is, of course, significantly different, and distinct, from an application for an interlocutory injunction. In an application for leave to amend a pleading, the court proceeds on the basis that the application will be granted (subject to other issues), provided that the amended pleading would not be one which would be liable to be struck out on a summary application.[72] Thus, the court ordinarily allows an amendment, unless it is plainly demurrable.[73] Self-evidently, those principles are significantly different to the principles that guide a court in determining a disputed question of law on an application for an interlocutory injunction, particularly where the application is to restrain recourse to a security provided under a building contract.

119 Based on those principles, in my view, the primary judge ought to have determined the correct construction of GC 5.2, in order to determine whether the respondent had demonstrated that there was a serious issue to be tried as to the application of that clause to the circumstances of the case revealed in the affidavits before him.

120 In the present case, it is not suggested that the construction of GC 5.2 would involve or require evidence as to the factual matrix in which the contract was concluded.[74] The construction of clause 5.2 is a discrete question, which did not involve consideration of any detailed or complex material. The resolution of the application before the court was not urgent, as the respondent's rights had been protected by an interim injunction. While it was important that the judge deliver his decision expeditiously, nevertheless the judge did have some time to consider the issues raised by the parties before him.

121 The appellant advanced detailed written submissions to the judge in relation to the construction of clause 5.2, and counsel addressed them in oral argument before the judge. The respondent did not address those arguments in any detail, other than to submit that the appellant was not 'acting reasonably', for the purposes of clause 5.2, in seeking to call on the guarantees, given that: the respondent contended it was not indebted to the appellant; the respondent had cross-claims against the appellant that far exceeded the appellant's claims against the respondent; and the respondent had the benefit of a monetary cap on its liability under clause 43 of the contract. That submission was based on the implicit proposition that, in circumstances of the kind relied on by the respondent, the appellant would not be acting reasonably by claiming the amounts stated in the recourse notice. In that way, the respondent did impliedly advance a construction of clause 5.2 for which it contended.

122 Importantly, the resolution of the issue of the construction of GC 5.2, was a necessary prerequisite to determining whether the respondent had established that there was a serious issue to be tried as to whether the appellant had acted 'reasonably' in claiming to be entitled to payment of moneys secured by the guarantee. The parties had placed a large amount of material before the judge relating to the claims and crossclaims made by each other in relation to the works carried out by the respondent. It was necessary to resolve the construction of clause 5.2, in order to determine whether, and how, the existence of the dispute, reflected in those claims and crossclaims, was relevant to the application of clause 5.2 If, for example, the appellant is correct in submitting that the phrase 'acting reasonably' only required the appellant to act bona fide in a subjective sense, it would follow that the existence of the dispute, as to the amount claimed by the appellant, would not be relevant to the exercise by the appellant of its rights under clause 5.2. Equally, if, as submitted by the respondent, that phrase imported an objective criterion, it would be necessary to determine the nature of that criterion, in order to decide whether the appellant was acting reasonably, in light of the issues raised in the dispute to its claim.

123 Recourse provisions, such as clause 5.2, are commonly included in construction contracts, and they serve an important commercial purpose in the construction industry.[75] Depending on the interpretation of such clauses, they not only provide security to a building owner, but they also allocate the risk as to which party shall be out of pocket pending resolution of a dispute arising from the performance of the construction contract.[76] If, on its correct construction, clause 5.2 was intended to serve both purposes, and, in particular, to allocate the risk as to which party would be out of pocket pending resolution of a dispute, the grant of an interlocutory injunction might have the effect of frustrating that intended purpose.

124 It was common ground that, as counsel for the appellant put it, clause 5.2, in the contract, is a 'bespoke' clause. Indeed, clause 5.2, in the contract in this case, is significantly different to the unamended clause 5.2 contained in the General Conditions of AS 4910 2002. Thus, a decision, as to the correct meaning of clause 5.2, would not have the potential to constitute an ongoing precedent as to the meaning of such clauses in the construction industry.

125 In his reasons for judgment, the judge invited the parties to state a question, relating to the proper construction of clause 5.2, for determination as a separate trial issue pursuant to r 47.04 of the Supreme Court (General Civil Procedure) Rules 2005. Counsel for the respondent placed some reliance on that suggestion by the judge, contending that the procedure, under r 47.04, was a preferable method of determining the construction of clause 5.2, than in the course of an application for an interlocutory injunction.

126 That submission, made by the respondent, overlooks the circumstances in which the question of the correct construction of clause 5.2 arose. It was the respondent which brought the application for an interlocutory injunction. As I stated, in doing so, it implicitly put to the judge a construction of clause 5.2, on which it relied. The appellant was entitled to oppose the application by the respondent, by relying on a different construction to that contended for by the respondent. In those circumstances, it would be somewhat unfair to the appellant if the issue, as to whether there was a serious issue to be tried, were resolved in favour of the respondent, based on the circumstance that there were two competing constructions of clause 5.2 thus relied on by the respective parties.

127 Further, while the r 47.04 procedure might be a useful mechanism by which to resolve the construction of GC 5.2, it would not be possible to use that procedure to determine the question whether, based on that construction, the appellant acted reasonably claiming the amounts specified in the recourse notice. Thus, resort to the r 47.04 procedure would not resolve the issue that was at the centre of the respondent's application.

128 For those reasons, in my view, the judge was obliged to determine the proper construction of clause 5.2 for the purposes of the application for an interlocutory injunction by the respondent. Accordingly, I consider that the failure of the primary judge to undertake a construction of clause 5.2 constituted appellable error in the exercise of his Honour's discretion.

129 The competing submissions by the parties raise two issues concerning the construction of clause 5.2, namely, first, the meaning of the phrase 'acting reasonably' in that clause, and, secondly, whether the security, provided pursuant to the clause, extended to costs and expenses not yet paid or incurred by the appellant in remedying defects in the respondent's work or in completing the contract.

130 On the first issue, the appellant relied, substantially, on the submissions that it made to the primary judge. In particular, it submitted that the words 'acting reasonably' fix solely on the appellant's motive for making the claim for payment. Thus, those words only required the appellant to demonstrate that it had a bona fide arguable claim, in a subjective sense, in order to be able to access the security. In particular, it was submitted that it was not necessary that the claim itself had to be reasonable, or that the concept of reasonableness involve an assessment of the actual substratum of the facts supporting the claim. Rather, the critical question was whether the appellant, from a subjective point of view, had acted reasonably in making the claim as a basis for seeking recourse to the security.

131 Alternatively, it was submitted on behalf of the appellant that, if the phrase 'acting reasonably' involved an objective element, in order that the appellant be disentitled from recourse to the security, the respondent would need to establish that no reasonable person in the appellant's position would have formed a view that it had a claim to be entitled to payment of the claim.

132 In both senses, the appellant emphasised that the words 'may claim to be entitled', in clause 5.2, did not require the appellant to demonstrate that it had an actual entitlement, for the purposes of being entitled to have recourse to the security under clause 5.2. Rather, the question was whether the appellant was acting reasonably in claiming to be entitled to payment or reimbursement stated in the notice. In that respect, counsel for the appellant referred to the statement by Pembroke J in FMT v Aircraft Gate Support Systems v Sydney Ports Corporation,[77] that, for the purposes of determining what is a 'claim' for the purpose of a similar recourse provision in a building contract, an appropriate analogy is the criterion used for determining whether or not there should be a summary dismissal of a claim or proceeding, as prescribed by the High Court in General Steel Industries v Commissioner for Railways.[78]

133 In respect of the second issue, arising under clause 5.2, the appellant submitted that, on the proper construction of clause 5.2, the claims, referred to in that clause, did extend to liabilities and expenses incurred, but not yet paid, by the appellant. In that respect, the appellant referred to clause 43.5.5 of the General Conditions, which provided that:

The contractor must indemnify and keep indemnified the Principal against all loss, costs, claims and liabilities which may arise as a result of the contractor's breach of its representations and warranties under this clause 43A.

134 It was submitted that, ordinarily, the concept of an indemnity extends to cover costs and liabilities that may arise or be incurred by the indemnified party, notwithstanding that those costs have not yet been incurred or paid to the third party.

135 In response, the respondent submitted that the phrase 'acting reasonably' involves an objective analysis, by reference to the facts and circumstances of the case. In particular, as I have stated, it was submitted that the appellant was not acting reasonably in claiming to be entitled to monies or indemnity under the contract, in circumstances in which: the respondent had contended that it had validly terminated the contract on 28 September 2011; the respondent contended that it had no indebtedness to the appellant; the respondent's claims against the appellant far exceeded the appellant's claims against the respondent; and the respondent had the benefit of a liability cap under clause 43.3, restricting any claim that the appellant might have against it, under clause 5.2, to the sum of $2,024,215.

136 It was submitted that, as the respondent had claimed to be discharged from further performance of the contract when it terminated the contract on 28 September 2011, the appellant was not reasonably entitled to consider that it had a claim to recover any amount towards the cost of completing the project. It was further pointed out that the amount of the respondent's claims (ranging between $17.9 million and $67.1 million) 'dwarf' the claims of the appellant ($9,443,000). Further, it was submitted that as the appellant's claims against the respondent were subject to the cap prescribed by clause 43(c)(vi) of the General Conditions, the appellant was not acting reasonably in asserting an entitlement to recourse in respect of an amount in excess of it.

137 In relation to the second issue, it was submitted, on behalf of the respondent, that a call may only be made under clause 5.2 for payment or reimbursement of monies due, rather than for monies which may become due in the future. It was pointed out that, of the monies claimed in the recourse notice, only two items (totalling $1,428,352), were for reimbursement of monies actually expended by the appellant, as distinguished from estimates for monies that may be due in the future. Thus, it was submitted that, as the recourse notice seeks recourse to the securities for a sum, which is greater than the amount actually expended by the appellant, the notice was outside the framework of what was contemplated by clause 5.2.

138 The principles, relating to the construction of security clauses in construction, and similar, contracts, have been discussed in a number of the authorities. They were helpfully outlined by the Full Court of the Federal Court in Clough Engineering.[79] For present purposes, the principles may be stated as follows:

(1) Subject to three principal exceptions, a court will not enjoin a party from recourse to a performance guarantee. Those exceptions are:

(a) The court will enjoin a party in whose favour the guarantee has been given from acting fraudulently.

(b) The court will enjoin such a party from acting unconscionably in contravention of the Competition and Consumer Act 2010 (Cth).

(c) The court will restrain such a party from acting in breach of a contractual promise made by it not to call on the guarantee in particular circumstances.[80]

(2) A recourse provision should be construed in light of all the other relevant provisions of the contract, including the terms of the security which formed part of the contract.[81]

(3) In construing any contractual limitation on the exercise by a party to have recourse to its rights to the security, the court should take into account the commercial purposes served by security clauses in construction contracts, and to which I have referred.[82]

(4) In particular, the commercial background for the contract informs the construction of a security clause, so that the court should 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]

(4) Accordingly, clear words are required to support a construction that inhibits a beneficiary of a security clause from calling on a performance guarantee where a breach is alleged in good faith (that is, non-fraudulently).[84]

139 In the present case, clause 5.2 contains three preconditions to the exercise by the appellant of its right to access a security specified in clause 5.1. First, the appellant must be 'acting reasonably' in making the claim to the entitlement to payment or reimbursement. Secondly, the claim by the appellant must be in relation to an entitlement to one of the three categories of payment, reimbursement or indemnity, specified in sub-clauses (i), (ii) and (iii) of clause 5.2. Thirdly, the appellant must first give the respondent five days' notice of its intention to have recourse to the security.

140 Each of those three conditions are in contention in this case, although the focus of the appeal was on the first condition. In that respect, the question before the primary judge was, and on appeal is, whether the respondent has demonstrated that there was a serious issue to be tried that the appellant was not acting reasonably in the claim specified in the recourse notice of 8 August 2014.

141 In construing clause 5.2, it is important to bear in mind, first, that that provision does not require the appellant to establish or demonstrate an entitlement to the payment, indemnity or reimbursement referred to in the clause. Rather, it is sufficient that the appellant has a 'claim' to such an entitlement. In that respect, it is relevant that the clause only requires the appellant to provide five days' notice to the respondent of its intention to have recourse to the security. In that way, it is clear that the security, provided under clause 5.2, was intended to serve both purposes described by Callaway JA in Fletcher Construction, namely, to provide security to the appellant, and also to allocate the risk to the respondent as the party which should be out of pocket pending resolution of any dispute between the parties.

142 On the other hand, the requirement, that the appellant be 'acting reasonably' in making the claim, is an express qualification to the appellant's right to access the security provided in clause 5.1. The qualification is expressed to require that the appellant be 'acting reasonably' in making the claim. Thus, it does not, in express terms, require that the claim itself be reasonable. In particular, the clause does not make it necessary that the claim, ultimately, be proven to be a reasonable claim by the appellant. Rather, what must be established is that the appellant, in making the claim, was then 'acting reasonably'. In that way, the phrase 'acting reasonably' has an important temporal aspect. It focuses attention on the conduct of the appellant at the time at which the appellant made the claim stated in the recourse notice.

143 It was argued on behalf of the appellant that the phrase 'acting reasonably' required the appellant to do no more than act bona fide in a subjective sense. That submission does not give adequate weight to the requirement that the appellant be acting 'reasonably'. Ordinarily, concepts of reasonableness are construed as importing an objective standard of conduct. As I have already pointed out, clause 5.2 is a bespoke clause. It was specifically chosen by the parties, in order to address the circumstances in which the appellant would be entitled to have recourse to the security. If the parties had intended to require that the appellant only act bona fide in making the claims that were subject to the recourse notice, they would have expressed the requirement in such terms. Rather, as I stated, they selected a phrase which ordinarily imports the notion of an objective standard of conduct, as a qualification to the entitlement of the appellant to have recourse to the security.

144 Thus, in my view, clause 5.2 required that the appellant, at the time it made the claim, then be acting reasonably, in an objective sense, based on the information and facts then known, or which reasonably ought to have been known, to the appellant at that time. However, as I stated, at the same time, clause 5.2 did not require the appellant to have such knowledge that would decisively establish its entitlement to payment, indemnity or reimbursement of the monies claimed in the recourse notice. Rather, the clause required no more than that the appellant have acted reasonably in making the claim, based on the facts and circumstances, which it knew, or ought to have known, concerning the validity of that claim.

145 The second issue, concerning the construction of clause 5.2, is whether, under that clause, the appellant was entitled to access the security, for claims by it to be entitled to an indemnity by the respondent in respect of monies, which had not yet been paid, or liabilities that had not yet been incurred, by the appellant. In particular, some of the costs of repairing defective work, referred to in the recourse notice, had not at that time been either incurred or paid by the appellant. Similarly, the costs of completing the works, referred to in the recourse notice, had not been incurred or paid by the appellant. It was submitted on behalf of the respondent that clause 5.2 only permitted the appellant to have recourse to the security in respect of a claim to indemnity for liabilities that had been incurred, or monies that had been paid, by the appellant.

146 I do not accept that submission. Clause 5.2 does not expressly limit the right of the appellant to make a claim only in respect of monies that have been paid by the appellant, or in respect of liabilities already incurred by the appellant, as the basis for the appellant having recourse to the security. Indeed, as senior counsel for the appellant pointed out, the different language used in subclause (i) ('the payment of monies ... '), to that employed in subclause (ii) ('reimbursement of any monies paid'), militates against the construction contended for on behalf of the respondent.

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Cases Cited (11)