Total Construction Pty Ltd v Catholic Healthcare Limited

Background

1. Clause 5.2 of the General Conditions of Contract (the General Conditions) which form part of the Contract provides: Recourse (a) Security shall be subject to recourse by the Principal [that is, the defendant] if: (i) the Principal has a bona fide claim that the Contractor [that is, the plaintiff]: (A) is in default under the Contract; or (B) has suffered: (1) an Enforceable Insolvency Event other than an event referred to in paragraph (a)(vi) of the definition of Enforceable Insolvency Event; or (2) a Contingent Insolvency Event and a Contingent Insolvency Event Authorisation has been obtained to enforce this right; or (ii) the Principal exercises its rights under subclause 37.6. (b) The Principal is not required to give any notice to the Contractor of its intention to have recourse to security or to convert security into money.
2. The security took the form of two unconditional bank guarantees each for 2.75 percent of the contract sum.
3. Clause 5.2A provides: No Injunction The Contractor unconditionally acknowledges and agrees that: (a) it will not at any time take steps to injunct or otherwise restrain: (i) any issuer of any security contemplated in this clause 5 from paying the Principal pursuant to any security; or (ii) the Principal from: (A) taking any steps to obtain payment under any security; (B) using the moneys received under any security; or (C) using any retention moneys, held by the Principal; (b) if the Principal, acting in accordance with its rights under the Contract, takes steps to obtain payment under, or obtains payment under, any security under this clause 5, or uses the moneys converted or received under any security, the Contractor will not suffer any damage to reputation; and (c) the Principal has entered into the Contract in reliance upon the Contractor's acknowledgements given in subclauses 5.2A(a) and 5.2A(b).
4. Clause 34.3 of the General Conditions states that the Contractor may be entitled to an extension of time in certain circumstances. Clause 34.3(d) states: If the Contractor fails to provide the Principal's Representative with the claim within the time period and containing the details required under subclause 34.3(b), the Contractor shall not be entitled to any EOT [Extension of Time] for the further delay.
5. Clause 39.2 relevantly provides: Contractor's default If the Contractor commits a substantial breach of the Contract, the Principal may give the Contractor a notice to show cause. Substantial breaches include: (a) … (b) … (c) substantial departure from a program without reasonable cause or the Principal's Representative's approval; … (k) a materially detrimental change in the financial position of the Contractor from the financial position of the Contractor at the date of the Contract and the date of commencement of WUC [Work Under the Contract] or, if they are different dates, whichever is the earlier, as determined by the Principal in its absolute and sole discretion.
6. Clause 39.3 sets out the information to be included in the show cause notice. Clause 39.4 provides that if the Contractor fails to show reasonable cause by the time stated in the show cause notice, the Principal may by notice to the Contractor: (a) take out of the Contractor's hands the whole or part of the work remaining to be completed and suspend payment until it becomes due and payable pursuant to subclause 39.6; or (b) terminate the Contract.
7. Clause 39.5 relevantly provides: Completion of work (a) The Principal may complete work taken out of the Contractor's hands under subclause 39.4(a), either itself or by engaging a person to do so.
8. Clause 39.6 relevantly provides: Payment for completion of work (a) When work taken out of the Contractor's hands under subclause 39.4(a) has been completed, the Principal's Representative shall assess the cost thereby incurred and shall certify the difference between that cost (showing the calculations therefor) and the amount which would otherwise have been paid to the Contractor if the work had been completed by the Contractor. If the amount certified constitutes more than would have been paid to the Contractor, that amount shall be due and payable from the Contractor to the Principal. (b) Without limiting subclauses 39.6(a) and 39.6(c), the Contractor indemnifies the Principal against any cost, expense, loss, damage or other liability that the Principal suffers or incurs, or that the Principal reasonably anticipates that it will suffer or incur, as a result of the Principal taking work out of the Contractor's hands under subclause 39.4(a) or terminating the Contract under subclause 39.4(b). …
9. Clause 43.9 provides: Amounts due Where no time is stated in the Contract for payment of an amount due from the Contractor to the Principal, that amount is payable on demand being made by the Principal. This subclause 43.9 does not apply to any amount that is due and payable, which is payable without demand being made by the Principal.
10. On 4 May 2023, the defendant served a show cause notice on the plaintiff. The show cause notice identified a number of substantial breaches of the Contract including that the plaintiff had substantially departed from a program without reasonable cause or the Principal Representative's approval and that there had been a material detrimental change in the financial position of the plaintiff. In relation to the plaintiff's financial position, the show cause notice stated: The Principal also understands that the Contractor has projected a negative cash flow of the business for the next 3 to 6 months and is anticipating a loss in financial year 2023. The Principal has grave concerns as to the Contractor's financial capacity to complete the remaining works. The Contractor has suggested that the Principal make payment to the Contractor of approximately $3 million (in the absence of contractual claim or entitlement). The Principal understands that the Contractor expects to lose $5.8 million on this project (Kincumber). The Principal understands the Contractor is having financial difficulties on other projects and between this Kincumber project and three other projects (Southern Cross Care, City Kitchens and Redfern Social Housing) the Contractor expects to lose approximately $8 million.
11. On 11 May 2023, the plaintiff responded to the show cause notice. It stated that the project had incurred 186 inclement weather delays, although at that stage no extensions of time had been sought. It did not give a substantive response to the information contained in the show cause notice in relation to the plaintiff's change in financial position. Shortly after responding to the show cause notice, the plaintiff served a number of applications for extensions of time. It appears to be common ground that those applications were out of time.
12. On 19 May 2023, the defendant served a notice terminating the Contract. It gave extensive reasons for its decision to do so. On the same day, it served a "Principal's demand for payment pursuant to the indemnity" in the amount of $11,900,892.35. That amount was calculated as the difference between the "cost to complete as assessed" in the amount of $34,161,739.52 and the amount that the plaintiff would have received if it had completed the work, which was said to be $22,260,847.17. The notice included a rough breakdown of the estimated additional costs to complete.

Reasons

1. The defendant submitted that in the case of an application to injunct a party from calling on a bank guarantee, the test is whether there is a strong prima facie case that the plaintiff is entitled to final relief, not simply whether there is a prima facie case: see Daewoo Shipbuilding & Marine Engineering Co Ltd v INPEX Operations Australia Pty Ltd [2022] NSWSC 1125 (Daewoo) at [70]-[74], [84]-[86] per Rees J. It was unnecessary to consider the scope of this principle in the present case, since the result was the same whichever test is applied.
2. The plaintiff advanced two reasons for why the defendant was not entitled to call on the bank guarantees. First, it submitted that on the correct construction of cl 5.2, the defendant was not entitled to call on the guarantees. Second, it submitted that it was entitled to relief under s 20 or s 21 of the Australian Consumer Law, which prohibit a person from (1) engaging in unconscionable conduct within the meaning of the unwritten law (s 20) and (2) engaging in unconscionable conduct more generally in connection with the supply or possible supply or acquisition or possible acquisition of goods or services (s 21).
3. The plaintiff made two submissions in relation to cl 5.2. First, it submitted that the defendant did not have "a bona fide claim that [the plaintiff] is in default under the Contract". How that could be the case was never clearly articulated. I accepted the defendant's submission that "bona fide" in this context means an honest and genuine belief that the plaintiff is in default under the Contract on a basis that is not specious, fanciful or untenable: see Lanskey Constructions Pty Ltd v Westrac Pty Ltd [2022] WASC 90 at [38]ff (Hill J); Duro Felguera Australia Pty Ltd v Samsung C&T Corporation [2016] WASC 119 at [27] (Le Miere J). The plaintiff did not advance some different meaning of the phrase "bona fide".
4. In the present case, the defendant set out reasons in its show cause notice and its termination for why it said that the plaintiff was in default under the Contract. The plaintiff made no attempt to explain how it could be said that those reasons were not honestly and genuinely held, or that the basis for holding them was specious, fanciful or untenable. It was clear that no such case could be made out on the evidence. At the time the Contract was terminated no extensions of time had been granted. No substantive attempt had been made to address the defendant's concerns in relation to the plaintiff's financial position. It was therefore reasonable for the defendant to form the views that it did.
5. Second, the plaintiff submitted that cl 5.2 of the General Conditions should be interpreted as only permitting recourse to the security once any amount payable to the defendant had been quantified.
6. In my opinion, this was an appropriate case for the Court to reach a conclusion on the correct interpretation of cl 5.2, because the correct construction of that clause went squarely to the question whether the defendant was entitled to call on the security. As Osborn and Ferguson JJA explained in Sugar Australia Pty Ltd v Lendlease Services Pty Ltd [2015] VSCA 98 at [43]: The practice adopted in the reported cases relating to performance bonds … 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.
7. In my opinion, cl 5.2(a) of the General Conditions was clear. What triggered the right to call on the guarantees was a bona fide claim that the plaintiff was in default under the Contract. The defendant was not required to wait until it was able to quantify its loss as a consequence of that default. That interpretation was consistent with one of the purposes of the guarantees, which was to allocate to the plaintiff the risk of who should be out of pocket to the extent of the guarantees pending resolution of the dispute between the parties concerning the rights of the defendant to terminate the Contract and complete the work itself: see Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812 at 826-7 (Callaway JA); Daewoo at [8]ff.
8. Moreover, in my opinion an amount was payable immediately under the contract which exceeded the amount of the bank guarantees. Clause 39.6(a) provides a mechanism for the assessment of completion costs. Clause 39.6(b) provides for a more extensive indemnity which includes amounts which the defendant "reasonably anticipates it will suffer or incur". There may be questions concerning the relationship between the two clauses. However, in my view, it could not be the case that the defendant was only entitled to exercise a right under the guarantees once completion costs had been determined under cl 39.6(a). Such an interpretation would make cl 39.6(b) otiose and would undermine the purpose of the guarantees.
9. Although there may be a question whether the defendant reasonably anticipated that it would incur all the costs claimed in its demand for payment dated 19 May 2023, the relevant question was whether the defendant reasonably anticipated that it would incur costs up to the total value of the bank guarantees, which was $1,579,408.06. Having regard to the amounts identified by the defendant in its demand for payment and the value of the project, it seemed likely that the defendant could reasonably have anticipated that it would incur at least that amount.
10. At the time that the plaintiff applied for the ex parte interlocutory injunction, it had produced no evidence that the defendant had engaged in unconscionable conduct. I nonetheless granted the interlocutory injunction for a short time to give the plaintiff an opportunity to plead a case of unconscionable conduct and to lead further evidence on that issue if it wished to do so.
11. The plaintiff sought leave to file a list statement on the return of the summons. Although that list statement claims relief under ss 20 and 21 of the Australian Consumer Law, it does not plead any conduct that could possibly amount to unconscionable conduct on the part of the defendant. It was plain that the plaintiff was unable to identify any unconscionable conduct. Consequently, the claim for an interlocutory injunction could not be sustained on that basis.

Costs

1. The claim for an interlocutory injunction essentially depended on the plaintiff having a reasonable argument that the defendant acting bona fide could not call on the guarantees or that the defendant would engage in unconscionable conduct if it did so. They are serious allegations which the plaintiff had no basis for making. At the time the plaintiff made the application for an ex parte injunction, it did not draw my attention to cases which make it clear that only in rare circumstances will a court grant an interlocutory injunction to restrain a party from calling on a bank guarantee because to call on the bank guarantee would involve unconscionable conduct: see, in particular, Clough Engineering Limited v Oil and Natural Gas Corporation Limited (2008) 249 ALR 458; [2008] FCAFC 136 at [138] (French, Jacobson and Graham JJ). It ought to have done so.
2. In my opinion, it is appropriate in those circumstances for the plaintiff to pay the costs of its application for an interlocutory injunction on an indemnity basis.

Orders

1. Accordingly, the orders of the Court are: 1. The plaintiff pay the defendant's costs of the application for an interlocutory injunction made on 26 May 2023 on an indemnity basis; 2. The proceeding be stood over for directions to 9 June 2023.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 01 June 2023