Universal Publishers Pty Ltd v Australian Executor Trustees Limited

Judgment 1HIS HONOUR: On 11 December 2013, on the second plaintiff giving the usual undertaking as to damages, I extended the injunction initially given on 3 December 2013 until further order. I did so to hold the position until I could give judgment on the application. 2In these proceedings the plaintiffs seek an injunction to restrain the defendant from making a demand or calling upon a banker's undertaking provided by Westpac Banking Corporation to the defendant. The question is whether the injunction should now be discharged. I have concluded that it should not. My reasons follow. 3The banker's undertaking was provided at the request of the second plaintiff, Telstra Corporation Limited. Westpac unconditionally undertook to pay on demand any sum which might from time to time be demanded by the defendant (Australian Executor Trustees Limited) ("AET") to a maximum aggregate sum of $936,000. The first plaintiff, Universal Publishers Pty Limited ("Universal") is now a subsidiary of Telstra. It was a lessee under a lease that commenced on 30 July 1999 and expired on 29 July 2009 of land in Waterloo Road, Macquarie Park, New South Wales. 4On 8 November 2012 AET commenced proceedings (proceedings 2012/348176) against Universal. In the 2012 proceedings AET alleges that Universal breached clauses 8.8 and 21.1 of the lease by having failed to yield up possession of the property in a state that was duly maintained and repaired in accordance with the covenants in the lease, in having failed to remove an underground fuel storage tank, and in having failed to reinstate and remediate the property as required by clause 21.1 of the lease. 5In the 2012 proceedings AET claims damages of $2,688,432 and interest. The damages are claimed on the basis of there having been a reduction in the value of the land by reason of the alleged breaches of the lease, or by reference to expenditure that AET says it will incur in remedying the alleged breaches. Damages for loss of rent and contributions to outgoings are also claimed. 6The 2012 proceedings have not been determined. Universal denies that it is in breach of the lease. AET has served its evidence. The time for Universal to serve its evidence has not arrived. On 26 November 2013 AET's solicitors gave Universal seven days notice that it intended to call on the banker's undertaking. On 3 December 2013 I granted Universal's application for an ex parte injunction to restrain AET from calling on the banker's undertaking for a short period. That injunction has been extended to preserve the status quo until the question of its entitlement to call on the banker's undertaking can be determined at a contested hearing. 7Clauses 8.8 and 21 of the lease provide: "Yield up Possession 8.8. At the expiration or sooner determination of the Term the Lessee shall yield up to the Lessor the Premises (but excluding any fittings and fixtures which are tenants trade fixtures or fittings or which are otherwise required to be removed pursuant to this Lease) duly repaired and maintained in accordance with the covenants herein contained having regard to their condition after completion of the Lessor's Works or in the event of any part of the Premises having been replaced or renewed during the Term, fair and tear excepted. ... 21. PART 21. - REMOVAL OF FUEL TANK AND REMEDIATION 21.1. If the option referred to in Part 20 of this Lease has not been executed by the Lessee on or prior to the terminating date or sooner determination of this Lease the Lessee will arrange at its cost for the fuel tank installed in the Premises to be removed, for the surrounding area remediated of any contamination and for the surface of the Premises to be reinstated following the removal and remediation to the satisfaction of the Lessor's consultant. The costs of the Lessor's consultant will be borne by the Lessee. 21.2. Prior to commencing any works in relation to the removal and remediation the Lessee must take out the appropriate insurance cover noting the interest of the Lessor (and provide a certificate of currency to the Lessor). 21.3. The Lessee assumes all liability for damage, loss or injury to any person or land resulting in any way from the fuel tank, its removal and the remediation of contamination and the reinstatement of the surface of the Premises, including leakage or spillage, if any, of any materials, contaminates or hazardous chemicals. 21.4. The Lessee releases and indemnifies to the fullest extent permitted by law the Lessor, its employees, consultants and agents from and against all actions, claims, financial penalties, costs, demands and liabilities of any kind resulting or arising in any way from the presence of any contaminate or hazardous chemicals upon the property arising from the fuel tank, its removal or remediation or the reinstatement of the Premises including any costs or expenses incurred in relation to any notice, direction order issued or made pursuant to the Environmental Offences and Penalties Act, the Environmentally Hazardous Chemicals Act, the Environmental Planning and Assessment Act, the Clean Waters Act or any other Act or Regulation in force from time to time in New South Wales relating to protection of the environment. 21.5. If the Lessee does not remove the fuel tank, remediate the surrounding area and reinstate the surface of the Premises within 14 days of the terminating date or sooner determination of this Lease as provided in this Clause 21, the Lessor may at the expense of the Lessee undertake the removal, remediation and reinstatement and make good any damage caused as a result of the removal and remediation. 21.6. The Lessee acknowledges that the lessor will not be obliged to release the Bank Guarantee until such time as the Lessor's consultant is satisfied with the removal of the fuel tank, remediation of the surrounding area and reinstatement of the surface of the Premises." 8Clause 19 provides: "19. PART 19. - BANK GUARANTEE 19.1. The Lessee shall deliver to the Lessor, on or before execution of this Lease, an unconditional Bank Guarantee for the amount specified in Item 16 to secure the Lessee's obligations under this Lease and losses and damages suffered by the Lessor pursuant to breach by the Lessee or termination of the Lease arising from such breach together with a copy of the Power/s of Attorney pursuant to which it is [signed]. 19.2. The amount of the Bank Guarantee shall be increased after any Review Date to an amount equal to twelve months of the Rent agreed or determined following a Rent review and the lessor's estimate of the Outgoings payable by the Lessee for the same period of twelve months. The Lessee will lodge with the Lessor a further or replacement Bank Guarantee to cover the difference between the Rent and estimated Outgoings payable over a period of twelve months and the amount currently held as Bank Guarantee within 21 days of the Rent being agreed or determined pursuant to the provisions of Clause 4.3. If there is a change in the person/s who are the Lessor, the Lessee shall on the Lessor's request provide a substitute Bank Guarantee in favour of the then current Lessor. 19.3. The Bank Guarantee shall be in a form acceptable to the Lessor. 19.4. In the event that the lessee: 19.4.1.1 defaults in the payment of Rent or in the performance or compliance of any other obligations under this Lease; or 19.4.1.2 breaches any other obligation, term, condition or covenant under this Lease, the Lessor is hereby authorised to demand that the guaranteeing bank pay to the Lessor such amount that (in the reasonable opinion of the Lessor) may be due to the Lessor as a result of such default, breach or non-observance by the Lessee or termination of the Lease pursuant to it. 19.5. The Lessor shall be entitled to recover Rent and damages for breach of covenant or arising from termination of this lease without being limited to the amount secured under the Bank Guarantee. 19.6. Any demand made shall not in any way be deemed to constitute a waiver by the Lessor of any default, breach or non-observance by the Lessee and shall not prejudice any other right of the Lessor arising from such default, breach or non-observance. 19.7. Should any amount of the Bank Guarantee be demanded from time to time by the Lessor as aforesaid then the Lessee shall upon demand by the Lessor and within twenty one (21) days from the date thereof provide to the Lessor a further Bank Guarantee for the amount so demanded (in a form acceptable to the Lessor) in order to reinstate the amount of the Bank Guarantee to an amount equal to the amount shown in Item 16, or to any amount equal to Rent for the number of months specified in Item 16. 19.8. The Lessor shall return to the Lessee the Bank Guarantee three months after expiry or termination of this Lease subject to the Lessee vacating the Premises and otherwise complying with its Obligations unless the provisions of this part have come into operation." 9The lease defines "Bank Guarantee" as meaning: "... an unconditional undertaking or guarantee from an Australian bank in favour of the Lessor in a form and content acceptable to the Lessor to enable the Lessor to be paid on demand an amount up to the sum referred to in Item 16 in total in one or more drawings and containing no expiry date." 10The banker's undertaking was given pursuant to terms of settlement in earlier proceedings in the Federal Court. It is unnecessary to refer to those terms of settlement as it was common ground that the right of AET to call on what the lease calls the Bank Guarantee is to be determined by the proper construction of the lease. 11The principal question is whether the lessor is entitled to make a demand on the Bank Guarantee because it claims that the defendant is in breach of the lease, or whether it is only entitled to do so if in fact the lessee has breached the lease. In the latter event the question is whether there is a serious question to be tried as to whether the lessee is not in breach of the lease, if so whether damages would be an adequate remedy if the lessor makes a demand on the banker's undertaking but it is held that it was not entitled to make that demand and, if damages would not be an adequate remedy, where the balance of convenience lies. 12The prima facie strength of the lessor's case that the lessee is in breach of the lease can be relevant to an assessment of the balance of convenience (Australian Broadcasting Corporation v O'Neill [2006] HCA 46; 227 CLR 57 at 71). 13A party may be restrained from calling on a performance bond, such as the Bank Guarantee in this case, if in doing so it would be acting fraudulently, that is, with knowledge that it was not entitled to call on the security or, if it does not act in good faith, for example if it capriciously selects the amount called on or, if in doing so it would be acting unconscionably and in breach of ss 20 or 21 of the Australian Consumer Law. No such contention is raised by Universal in this case. 14A party may also be restrained from calling on a performance bond such as the banker's undertaking in this case if calling on the performance bond is in breach of an express or implied negative stipulation in the contract. Where the clause for the provision of such a bond is intended not only to provide security for the performance of the other party's obligations but also to allocate the risk as to who should be out-of-pocket pending resolution of a dispute as to whether the other party is in breach of contract, the party may be restrained from calling on the bond if it is clear beyond serious argument that the party calling on the performance bond has no right to the amount claimed (see Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd (1998) 3 VR 812 at 821 and 826; Clough Engineering Limited v Oil & Natural Gas Corporation Limited [2008] FCAFC 136; (2008) 249 ALR 458; Reed Construction Services Pty Ltd v Kheng Seng (Aust) Pty Ltd (Austin J, New South Wales Supreme Court, 20 November 1998, unreported BC9806316 at [12]); FMT Aircraft Gate Support Systems v Sydney Ports Corporation [2010] NSWSC 1108 at [7]-[11]). 15Again, it is not claimed in this case that it is clear beyond serious argument that the lessee is not in breach of the lease. 16Whether the purpose of the provision of the performance bond in the form of the banker's undertaking is only to provide security for the performance of the lessee's contractual obligations, or whether the purpose is also to allocate the risk as to who should be out-of-pocket pending resolution of a dispute, is a conclusion to be drawn from the construction of the lease. 17The latter purpose of such a provision can readily be drawn if the contract provides that the performance bond may be called on if the party claims to be entitled to be owed money, or claims that the opposite party is in breach of the contract. Examples of clauses in such a form are to be found in FMT Aircraft Gate Support Systems v Sydney Ports Corporation and Patterson Building Group Pty Ltd v Holroyd City Council [2013] NSWSC 1484. That is not this case. 18Clause 19.1 provides that the purpose of the unconditional Bank Guarantee is to secure the lessee's obligations under the lease and losses and damages suffered by the lessor pursuant to a breach of the lease by the lessee or termination of the lease arising from such a breach. That is an express statement as to the purpose of the provision of the security. 19Clause 19.4 confers authority on the lessor to make a demand on the Bank Guarantee if the lessee defaults in the payment of rent or if the lessee breaches an obligation, term, condition or covenant under the lease. This is an express stipulation as to the circumstances in which the lessor can make a demand on the Bank Guarantee, that is, that there has been default or a breach by the lessee. That necessarily implies that the lessor is not entitled to make a demand on the Bank Guarantee if there has not been a default or breach by the lessee. 20AET submitted that the governing consideration in construing the clause is that the security is to be in the form of an unconditional Bank Guarantee which in turn is defined as being an unconditional undertaking or guarantee from an Australian bank in favour of the lessor, in a form and content acceptable to the lessor, to pay on demand an amount up to a specified sum. AET submits that because the undertaking from the Bank is to be unconditional it is entitled, as against the lessee, to have recourse to the security if it claims in good faith that the lessee is in default or has breached the lease. It submits that this is how the authorities indicate such a clause should be construed and clear words are needed to inhibit a beneficiary from calling on a performance bond where a breach is alleged in good faith (Clough Engineering at [83] and [99]; ALYK (HK) Limited v Caprock Commodities Trading Pty Limited [2012] NSWSC 1558 at [88]). 21AET also submits that the authorities make it clear that the existence of a dispute as to whether there is an actual breach is not an answer to an invocation of the guarantee, citing Fletcher Construction (Aust) Limited v Varnsdorf Pty Limited at 821-822 and 821-829; Bachmann (Pty) Limited v BHP Power New Zealand Limited [1999] 1 VR 420 at [49], [50] and [54]; and Clough Engineering at [95]). AET also relies on cll 19.6 and 19.7. 22AET submitted that because cl 19.6 provides that any demand on the Bank Guarantee is not to constitute a waiver by the lessor of any default by the lessee and does not prejudice any other right of the lessor arising from such a default, the parties intended that the lessor should be entitled to have immediate recourse to the Bank Guarantee whilst preserving its other rights for a later trial. 23Clause 19.7 contemplates that a Bank Guarantee may be called on from time to time and requires it to be reinstated in that event. AET submitted that this suggests an interim and ongoing entitlement to call on the security which is inconsistent with the idea that none of it can be used until after a court has determined whether or not there has been a breach. Reference was made to Otter Group Pty Ltd v Wylaars [2013] VSC 98 at [24] where such considerations were material to the construction of a similar clause in the lease in that case. 24In my view cll 19.6 and 19.7 are neutral. It is true that the clauses are inconsistent with the idea that the Bank Guarantee could not be used until after a court has determined that there has been breach of the lease by the lessee but, as explained below, that issue is a false issue. Contrary to the reasoning in some of the authorities, the fact that a party's right to call on a performance bond may be conditional on the occurrence of an actual breach by the other party does not imply that the breach must be indisputable, or must have been established by judgment or arbitral award, or by an acknowledgement by the party in breach, before recourse can be had to the security. 25AET also pointed to the words in cl 19.4 that if the lessee were in default or in breach the lessor was authorised to demand that the guaranteeing bank pay it such amount that in the lessor's reasonable opinion may be due to it as a result of such a default or breach, et cetera. I agree with Universal's submission that the better construction of cl 19.4 is that if there has been an actual default or breach then the lessor can form a reasonable opinion as to the amount that may be due to it as a result of such a default or breach, but if there is no default or breach there is no occasion for the lessor to form such an opinion. 26AET submitted that this construction was manifestly uncommercial because it rendered any determination by a lessor pointless in the common case where there is a dispute as to the existence of a breach that needed resolution by a court. If a court resolved the question of breach it would ordinarily be expected to determine as well the quantum of loss suffered as a result of breach. 27Again, AET's submission assumes, wrongly in my view, that the requirement that there have been an actual breach or default before recourse can be had to the Bank Guarantee requires that there first have been a judicial or arbitral determination as to whether the lessee is in breach before the lessor could have recourse to the security. That need not be so. 28There remains to be considered the requirement expressed in some of the authorities that clear words are needed before a beneficiary will be inhibited from calling on an unconditional performance bond or guarantee. 29In Wood Hall Limited v Pipeline Authority (1979) 141 CLR 443 the High Court held that a bank which had given an unconditional undertaking to pay money on demand should not be restrained from paying on its undertaking. The High Court emphasised (at 445, 453 and 457) the commercial importance of such documents as being equivalent to a cash payment. 30That case turned on the construction of the banker's undertaking which was expressly unconditional. The contractor did not rely on any express or implied term of its contract with the Pipeline Authority that it would not call on the undertaking in the circumstances that then obtained. Stephen J observed (at 459) that had the construction contract itself contained some qualification upon the Authority's power to make a demand under a performance guarantee the position might well have been different, but in fact the contract was silent on that matter. 31Following and notwithstanding the decision in Wood Hall Limited v Pipeline Authority a number of first instance decisions involving building or construction contracts considered the position where the right of a party, usually the principal, to call on a security was conditional on its being entitled to payment of money under the contract from the opposite party. Most of the cases were referred to by Austin J in Reed Construction Services Pty Limited v Kheng Seng (Aust) Pty Limited. It had been held in many such cases that the contracts contained an implied negative stipulation that the party could not call on the security unless it was entitled to the payment of moneys under the contract. 32By contrast, in Hughes Bros Pty Ltd v Telede Pty Ltd [1989] BCL 210 the contract provided that the party could claim on the security when "the proprietor may be entitled to the payment of moneys by the builder". Cole J (as his Honour then was) concluded that the proprietor could have recourse to the security where it claimed an entitlement to moneys, provided such claim entitlement was not specious or fanciful. His Honour said that "may be entitled" could not be read as "is entitled" (at 216). 33In Reed Constructions Austin J observed that the difference in contractual language between "shall be entitled" and "may be entitled" was critical to explaining the differences in approach and outcome of those decisions. However, in Bachmann (Pty) Limited v BHP Power New Zealand Limited, the Victorian Court of Appeal, Brooking JA (with whom Tadgell and Ormiston JJA agreed) explained that the difference in the contractual language was attributable to the use in the Hughes Bros case of the subjunctive rather than the indicative mood (see also Baulderstone Hornibrook Pty Ltd v Qantas Airways Ltd [2000] FCA 672 at [12]). 34In Fletcher Construction Australia Limited v Varnsdorf Pty Ltd the builder provided stand-by letters of credit under a building contract, the relevant terms of which provided: "6.6 Security (a) Security must be given in the amount in the Schedule of Contract Information and in accordance with this clause. (b) The security must be in a form and given by a financial institution approved by the Owner. ... In the Schedule of Contract Information the amount of security was expressed as follows: $5,000,000 in the form of an unconditional undertaking to pay in favour of the Owner. Form and provider of undertaking must be approved in advance by the Owner." 35In Fletcher Construction the Victorian Court of Appeal held that the stand-by letters of credit afforded more than security for an amount which might be found due or which was actually due by the builder. The clause for the provision of security was also a risk allocation device to decide who should be out-of-pocket pending the resolution of a dispute as to whether the owner was entitled to recover from the builder. Charles JA said (at 821-822): "It is, I think, of great importance that Varnsdorf's right to the security which is to be provided under cl. 6.6 and the Schedule of Contract Information, is in a form approved by Varnsdorf and 'in the form of an unconditional undertaking to pay in favour of' Varnsdorf. Hudson on Building and Engineering Contracts (para. 17,075) asserts that: 'Insofar as a construction contract may make clear provision for the furnishing of an unconditional guarantee as security for due performance, the normal interpretation, ... will be that, in response to the stipulated demand, an unqualified transfer of the sums in question is intended, provided only that there is a bona fide dispute or claim on the secured party's part, and that any further investigation of its merits or extent is not usually intended by the contract.'" 36Callaway JA said at 826-827: "In Group Josi Re v Walbrook Insurance Co Ltd [1996] 1 WLR 1152 at 1161-1162 Staughton LJ said that the effect on the lifeblood of commerce is precisely the same whether the guarantor, typically a bank, is restrained from paying or the beneficiary is restrained from asking for payment. There is nevertheless an important difference between restraining a bank from honouring a guarantee and restraining the beneficiary from calling upon it. In the former case the moving party seeks to prevent the bank from performing its contract; in the latter case the moving party seeks to prevent the beneficiary from breaching a provision of the underlying contract. A moment's reflection will show that the beneficiary, unlike the bank, may be restrained if there is an express prohibition in the underlying contract against calling upon the guarantee. In theory an implicit or implied prohibition is just as good. The practical problem is that it is much harder to establish. That is not because of a requirement that an implicit or implied prohibition against calling upon a guarantee must be clear. It is because the implication cannot be made if it would stultify, or even if it would be inconsistent with, the purpose for which the guarantee was taken. I should explain the sense in which I am speaking of express, implicit and implied prohibitions. By an express prohibition I mean a provision of the underlying contract, which may be positive or negative in form but is specifically directed to calling upon the guarantee, as for example a provision saying that it shall not be called upon during stage 1 of a contract to be performed in stages or, as in this case, that it is necessary to give ten days' notice before calling upon it. A provision simply saying that recourse may be had to the guarantee for moneys due or the like is not an express prohibition in the sense that I intend. The question in a case like that is whether a prohibition against recourse is implicit in the words of the contract. By an implied term I mean a term of the kind associated with the decision of the Privy Council in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266. Implication is the process of discerning either an implicit or an implied term. 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. Compare Burleigh Forest Estate Management Pty Ltd v Cigna Insurance Australia Ltd [1992] 2 Qd R 54 at p59 and Themehelp Ltd v West [1996] QB 84 in the dissenting judgment of Evans LJ at p103. 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. No implication may be made that is inconsistent with an agreed allocation of risk as to who shall be out of pocket pending resolution of a dispute and clauses in the contract that do not expressly inhibit the beneficiary from calling upon the security should not be too readily construed to have that effect. As I have already indicated, they may simply refer to the kind of default which, if it is alleged in good faith, enables the beneficiary to have recourse to the security or its proceeds." 37Whilst it is no doubt true, as Callaway JA said, that no implication can be made that is inconsistent with an agreed allocation of risk as to who shall be out-of-pocket pending resolution of a dispute, the question whether cl 19 of the lease in this case does have that additional purpose is the very question to be decided. 38In Fletcher Construction there appears to have been no provision such as is found in cl 19.4 in this case prescribing and thereby limiting the circumstances in which recourse could be had to the security. 39By contrast, in Bachmann Pty Limited v BHP Power New Zealand Pty Limited there was such a provision. That case concerned a contract for the manufacture, supply and commissioning of steel manufacturing equipment. Clause 5.5 provided: "A party shall not convert into money security that does not consist of money until the party becomes entitled to exercise a right under the contract in respect of the security". 40Clause 22.4 stipulated when the purchaser could exercise a right in respect of the security it provided that: "The purchaser may deduct from moneys otherwise due to the supplier any moneys due from the supplier to the purchaser and, if those moneys are insufficient, the purchaser can have recourse to security under the contract". 41The Victorian Court of Appeal held that clause 5.5 contemplated an unconditional security, and that was provided in the form of an irrevocable standby letter of credit. It upheld the primary judge's decision that the purchaser was entitled to call on the letter of credit notwithstanding a dispute as to whether the supplier owed any moneys to the purchaser. Brooking JA said (at 420, [30]): "30 ... The issue between purchaser and supplier concerns the words in cl. 5.5 'becomes entitled to exercise a right'. The purchaser says they require only that it shall have made a bona fide claim to be entitled to exercise a right under the contract in respect of the security. The supplier says they require something more than this. 31 Notwithstanding the able argument of Mr. Elliott on the supplier's behalf, I have not found it easy to determine just what, in his submission, that something is. In the course of his written outline of argument and his oral submissions Mr. Elliott invited adoption of a number of different views of the effect of cl. 5.5. This is not surprising, having regard to the words used in the clause, 'until the party becomes entitled to exercise a right'. One of the submissions was that a party does not become entitled to exercise a right when a serious dispute is extant. This submission does not in terms tell us when a party does become entitled to exercise a right, unless by implication the submission is that a party becomes entitled to exercise a right where it asserts that right and no serious dispute is extant about whether the entitlement exists. Another submission made by Mr. Elliott was that a party 'becomes entitled to exercise a right' where the existence of that entitlement has been authoritatively determined." 42His Honour then discussed the authorities and, with reference to the form of the building contract considered in Hughes Bros, said (at 434, [43]): "The clause does not mean 'whenever it is possible that the Proprietor is entitled'. It means 'whenever the Proprietor is entitled'. But of course to say this is not to say that 'entitled' necessarily bears some such meaning as 'entitled when the law is applied to the facts', or 'entitled by virtue of a determination': 'Entitled' must still be defined." 43His Honour concluded: "53 In the present case the matters of conversion of and recourse to the security, are dealt with by two general conditions, which should if possible be construed so as to work in harmony. Clause 5.5 prohibits conversion into money until the purchaser becomes entitled to exercise a right under the contract in respect of the security. Clause 22.4 entitles the purchaser to deduct from moneys otherwise due to the supplier any moneys due from the supplier to the purchaser and, if those moneys are insufficient, entitles the purchaser to have recourse to the security. Like cl. 3.13(b) in Fletcher, it confers a right of recourse against the security to obtain the balance if the exercise of the right of set-off which it also confers leaves a balance outstanding in favour of the purchaser. It would, as Charles J.A. said in Fletcher, be strange if the clauses concerned in that case and this - cl 3.13(b) and cl 22.4 conferred the practical right of recourse only where moneys were 'due' from the supplier to the purchaser in some such sense as actually or indisputably due. I would treat cll. 5.5 and 22.4 of the present contract, read in conjunction, as entitling the purchaser, as between itself and the supplier, to have recourse to the security where according to a bona fide claim made by the purchaser moneys are due to it from the supplier which exceed any moneys due from it to the supplier. 54 The fact that one of the forms of security recognised by cl.5.3, when regard is had to the approved undertaking which is attached, is cast in the now familiar form of an unconditional promise to pay on demand without reference to the supplier and notwithstanding any notice by it not to pay supports the view that the parties contemplated that it was the supplier who should be out of pocket pending the resolution of any dispute." 44This analysis appears to treat the words "actually due" and "indisputably due" as synonymous. As noted earlier, a similar idea lies behind a number of submissions made for AET. The same idea was advanced for AET when counsel addressed the difficulty that cl 19.4 does not say, as it might have done, that the lessor could have recourse to the security if it claimed that the lessee was in default or was in breach of the lease. 45The response for counsel for AET was that this was a neutral consideration. It might equally be said that the clause could have provided that the lessor could have recourse to the security if the lessee had agreed in writing or if a breach or default had been determined by a judgment or arbitral award. This submission posited the same dichotomy as appears to have been accepted in Bachmann. But that dichotomy is not a true one. 46In my view, in this case, the parties did not mean by clause 19 that the lessor could call on the security if it claimed that the lessee was in default. Nor did the parties intend that the lessor could only call on the security if the lessee was indisputably in default, or it had been established by judgment or award that it was in default. Their agreement was that the lessor could call on the security if the lessee was actually in default. No doubt that might be a matter of dispute. But the fact that the parties may be, or are likely to be in dispute, about the right of one to exercise a contractual right, is not a sufficient reason to strain in favour of one construction over another. This is a commonplace occurrence. 47If a contract provides that one party can terminate the contract if the other has committed a specified type of breach, it could hardly be said that the right of termination could be exercised merely if party A claimed that party B had committed the specified breach, nor that party A could only do so if the right of termination was indisputable. In the case of an asserted but disputed right to have recourse to security where the contract provides that recourse may be had if A is entitled to recover moneys from B, or recourse can be had if B is in default, then, prima facie, if A's entitlement to moneys or B's default is disputed, the question of interlocutory injunctive relief will be determined in the same way as other disputed questions of contractual rights are determined. 48The issue again was considered by the Full Court of the Federal Court in Clough Engineering. In that case the contract relevantly provided: "The Company shall have the right under this guarantee to invoked the Banker's guarantee and claim the amount there under [sic] in the event of the Contractor failing to honour any of the commitments entered into under this contract". 49The Full Court of the Federal Court said (at [81]-[83]): "[81] In determining whether the underlying contract confers an unfettered right to call upon the performance guarantee, the importance of such instruments in the construction industry, both nationally and internationally, is a factor which bears upon the question of construction of the contract. A number of authorities support this proposition: (1) In Wood Hall at CLR 457-8; ALR 396-7, Stephen J referred to English authority which described the performance guarantee as standing on a similar footing to a letter of credit. (2) In the passage from the judgment of Callaway JA in Fletcher Construction at 827 quoted above, his Honour emphasised the importance of commercial practice in construing the contract. The reference in the judgment of Charles JA at 822 to the passage from Hudson's Building and Engineering Contracts, is to similar effect. (3) In Bachmann, Brooking JA referred at [51] to the practice in the United States. He said that the generally accepted view in that country is that standby letters of credit (and hence, performance guarantees) are intended by the parties to the underlying contract to require the supplier or contractor to: [51] ... stand out of the amount of the credit in favour of the buyer pending resolution of the underlying dispute. (4) This approach is supported by the observations of Hobhouse LJ in Toomey v Eagle Star Insurance Co Ltd [1994] 1 Lloyd's Law Rep 516 at 520, that parties to a commercial contract are to be taken to have contracted against a background which includes the earlier authorities on the construction of similar contracts. [82] Notwithstanding the importance of commercial practice, the statements in these authorities do not suggest that the court should depart from the task of construing the terms of the contract in each case. What the authorities emphasise is that the commercial background informs the construction of the contract. In particular, as Callaway JA said in the passage quoted above, the court ought not too readily favour a construction which is inconsistent with an agreed allocation of risk as to who is to be out of pocket pending resolution of the dispute about breach. [83] It follows that clear words will be required to support a construction which inhibits a beneficiary from calling on a performance guarantee where a breach is alleged in good faith, that is, non-fraudulently. This view is also supported by the remarks of Charles JA in Fletcher Construction at 820-1. There, his Honour analysed and placed some doubt upon the correctness of decisions such as Pearson Bridge (NSW) Pty Ltd v State Rail Authority of New South Wales (1982) 1 Aust Const LR 81 at 86 (Pearson Bridge)." 50The Court added [at 103]: "[103] Indeed, the effect of the construction urged upon us by Clough would confine the practical right of recourse to the security to circumstances where there was no genuine dispute as to the question of breach. Council [sic] for Clough conceded that cl 3.3.3 did not require that the breach be established in curial or arbitral proceedings but in our view that does not detract from the proposition that the construction for which he contended would exclude ONGC from access to the security where Clough was able to point to a genuine dispute: Fletcher Construction at 822; Bachmann at [53]." 51This last paragraph goes too far. On any view, the security would have practical effect in providing security in the event if its being determined in Court proceedings or arbitration that the contractor was liable. The conclusion in paragraph 83, quoted above, is premised on the reasoning in paragraphs 81 and 82. Those paragraphs in turn are based upon two considerations. The first is that judicial notice was taken of the intended use of such instruments in the construction industry and perhaps international trade. This is consistent with the reference to Hudson on Building and Engineering Contracts. 52The second is that where commercial contracts have been given a settled interpretation, the parties may be taken to have contracted against a background which included that settled interpretation. I was referred to no case establishing that there was a settled interpretation of a clause such as clause 19 of the lease in the context of the provision of security in a commercial or industrial lease. 53It is true that in Otter Group Pty Limited v Wylaars Hollingworth J applied the principles requiring restraint against enjoining an issuer of an unconditional performance bond from performing its undertaking to a claim that a lessor should be restrained from calling on a security where the lessee disputed the lessor's right to do so (at [16]-[20]). However, claims against the issuer of a performance bond and claims by a party to a contract to restrain the other contracting party from calling on a performance bond, allegedly in breach of contract, are conceptually distinct. 54In Otter Group the claim to restrain the lessor from calling on the security would have failed for other reasons, including that damages would have been an adequate remedy. A case not noted in Otter Group, but which is relevant to whether or not there is now a settled interpretation of such clauses that requires express words to be displaced, is the decision of the New South Wales Court of Appeal in Lucas Stuart Pty Limited v Hemmes Hermitage Pty Limited [2010] NSWCA 283. There a builder provided unconditional undertakings from an insurer that was security for the builder's compliance with its obligations. The security could be called on "if the contractor has not materially complied with its obligations under this contract". 55The Court of Appeal held that the primary judge erred in construing the clause as if it referred to the builder's having failed to comply with a material obligation, as distinct from its having materially failed to comply with its obligations considered as a whole (at [25]). There was an unresolved serious dispute as to whether the builder had materially failed to comply with its obligations looked at as a whole (at [34]). Macfarlan JA, with whom Campbell JA agreed, said (at [36]-[43]): "[36] I note in this context that cl 16.2 is not conditioned upon the respondent being satisfied of the existence of material non-compliance by the applicant with its obligations. Rather, it is conditioned in my view upon the objective fact of such non-compliance. I accordingly differ from the following view expressed by the primary judge in the course of dealing with an issue that does not arise on this application: 61 Another point in respect of the breach that is necessary to support a notice under clause 16 is that the actual breach alleged in the notice does not have to be established as for a notice to be valid there need only be a bona fide claim by the proprietor that the builder has not materially complied with its obligations under the contract. [37] The primary judge relied upon the decision in Clough Engineering Ltd v Oil & Natural Gas Corporation Ltd (No.3) [2007] FCA 2082; [2008] FCAFC 136 and, on appeal, at (2008) 249 ALR 458, in support of this view. In that case the Full Federal Court placed considerable weight upon the fact that the clause there under consideration required provision of a performance guarantee in the form of that set out in an appendix and that the form referred to the payment by the guarantor 'notwithstanding any dispute(s) pending', without reference to the contractor and 'without any demur, reservation, contest or protest' (249 ALR 458 at [30] and [88]-[112]). Whilst the Clause pursuant to which the bonds were provided in the present case (cl 6.1) refers to 'unconditional undertakings' the Contract does not contain any wording such as was contained in the pro forma performance bond regarded in Clough as effectively qualifying the terms of the condition precedent stated in the relevant clause. Clough is accordingly distinguishable. [38] Because Clough is distinguishable and its correctness was not fully debated before this court, I refrain from expressing a concluded view as to its correctness. It is appropriate however for me to indicate that I have reservations about its correctness. [39] There are at least two principal goals that parties may seek to achieve by requiring that performance bonds be provided by a contractor to a principal in circumstances such as the present. [40] One is to provide security in the event of the insolvency of the contractor. The other is to enable the principal to obtain prompt payment of amounts it claims, notwithstanding disputes raised by the contractor. Not every contract seeks to achieve both goals. The present is one in which only the first is sought to be achieved. To assist in achieving the first goal the Contract thus states that the bonds to be provided are to be 'unconditional', with the consequence that the issuer is obliged to pay, without argument, if called upon by the respondent to do so. [41] So far as the second goal is concerned, cl 16.2 however only entitles the respondent to call upon the bonds if, as a matter of objective fact, the applicant 'has not materially complied with its obligations'. Accordingly, it is open, as has occurred here, for the applicant to seek to restrain the respondent from calling upon the bonds upon the basis that the pre-condition has, at least arguably, not been satisfied. [42] The position would have been different if cl 16.1 had made the respondent's entitlement to call upon the bonds dependent on the respondent's satisfaction or even simply upon the respondent's assertion that the applicant was in breach of the Contract. Provisions of this type would have gone a long way to achieving the second of the goals to which I have referred above. [43] My reservation about the decision in Clough is as to whether the contract in that case can truly be regarded as having been intended to achieve both purposes. Certainly the terms of the performance guarantee that the Full Court relied upon made it clear that the issuer of the guarantee could not withhold payment if a proper call were made but the condition precedent to the principal's right to call upon the guarantee was expressed in terms of objective fact, that is, 'in the event of the Contractor failing to honour any of the commitments entered into under this Contract' (see cl 3.3.3 quoted at 249 ALR 458 at [24]). It is not obvious to me why the terms of the guarantee given by the issuer should have been regarded as affecting the proper construction of this provision which related to the circumstances in which the Principal was entitled to call on the guarantee." 56Curiously, his Honour earlier said that the only argument pressed on appeal was as to the primary judge's construction that the contract required a failure by the builder to comply with a material obligation, rather than requiring a material failure by the builder to comply with an obligation (at [17]). His Honour said that no challenge had been made as to the correctness of the primary judge's conclusions in relation to various other arguments put at first instance (at [19]). However, if that were so, it is hard to see how the appeal could have succeeded in light of the primary judge's finding quoted at [36] of Macfarlan JA's reasons. 57Nonetheless, and although Macfarlan JA did not express a concluded view as to the correctness of Clough Engineering, his Honour's reasons at paragraph [36] are part of the ratio of the Court of Appeal's decision. That is to say, the construction adopted by the Court of Appeal was that it was not enough that the owner had a bona fide claim that the builder had not materially complied with its obligations under the contract because the owner's entitlement to have recourse to such security was conditioned on the objective fact of such non-compliance. On the Court's being satisfied that there was a serious question to be tried, the owner was not entitled to have recourse to the security it applied the usual principles as to whether damages would be an adequate remedy and the balance of convenience. 58In my view, the decision in Lucas Stuart Pty Limited v Hemmes Hermitage Pty Limited is inconsistent with the suggestion that Clough Engineering lays down principles applicable to all contracts that where an unconditional performance bond, or a like instrument, is provided as security for a party's obligations, express words will be needed to preclude a beneficiary of such security from calling on it if a breach is alleged in good faith. 59There need be no dichotomy between, on the one hand, a party's being entitled to claim on an unconditional performance bond because it claims in good faith that the other party is in default and, on the other hand, a party's entitlement to call on a security being indisputable or capable of being established objectively when the demand is made. There is a middle ground; that the claim of default may be raised in good faith but may be disputed. Whether the raising of a dispute as to the existence of a breach provides an answer to a claim being made on the performance bond will depend on the proper construction of the contract, including any evidence as to commercial practice that may be admissible or about which judicial notice can be taken. 60In this case, clause 19.1 expressly provides that the purpose of an unconditional bank guarantee is to provide security for the lessee's performance of its obligations. No further purpose for the security is identified. In my view, the clause does not provide for an allocation of the risk as to who should be out of pocket whilst a dispute as to the lessee's asserted breach is determined. Clause 19.4 specifies the circumstances in which the security can be called on, namely, an actual breach or default. That does not mean an indisputable breach of default. Nor does it mean a claimed breach or default. 61In my view, the language is clear. If the security is called on when the lessee is not in default, then the lessor will be in breach of an implied negative stipulation in clause 19. If the bank honours its undertaking, then the lessor will be liable to pay damages if it is ultimately determined that it was not entitled to call on the security. The case therefore raises the familiar issue as to whether there is a serious question to be tried that the lessor is not entitled to call on the bank guarantee, if so, whether damages would nonetheless be an adequate remedy if it is found that the lessor was not entitled to call on the bank guarantee and, if not, whether the balance of convenience favours restraining the lessor from calling on the security. 62The initial position taken by AET was that there was no serious question to be tried that it was not entitled to call on the bank guarantee. This was because the affidavit initially relied on by Universal exhibited the pleadings in the 2012 proceedings and the evidence served by AET in those proceedings, but provided no evidence in answer to AET's evidence to the effect that Universal was in breach of clause 21 of the lease. 63Universal then served and read additional evidence by reason of which it contended that there was a serious question to be tried as to whether it was in breach of the lease. 64At the outset of the hearing, senior counsel for AET accepted that there was a serious question to be tried as to whether the land had been remediated following removal of the fuel tank referred to in clause 21.1. Counsel submitted that nonetheless there was not a serious question that AET's consultant was reasonably satisfied that there had not been sufficient remediation. 65In the 2012 proceeding, AET has served a report of Mr Phillip Mulvey of Environmental Earth Services. He has provided an assessment of contamination on the site and the cost of remediation. Mr Mulvey's report has been provided as an expert witness. Contrary to AET's submissions, it does not appear that he is its consultant for the purposes of clause 21.1 to whose satisfaction the area surrounding the fuel tank was to be remediated, and to whose satisfaction the surface of the Premises was to be reinstated. 66On 29 September 2009, Hyperion Property Syndicate Pty Limited, corresponding on behalf of AET, stated that "our consultant Douglas Partners Pty Ltd" was unsatisfied as to the interim nature of a particular report that apparently concerned groundwater contamination. The letter to which Hyperion was responding was not tendered. I infer that the report as to which it was said that its consultant Douglas Partners Pty Limited was unsatisfied because of its interim nature was a report by a firm of called JB Environmental dated 27 August 2009 which concluded: ". The excavation has been successfully validated; . The source of the contamination (i.e. UST (underground storage tank) and backfill sand) have [sic] been successfully removed; . The hydrocarbon contaminated soil has been removed to the extent practicable and; . That the validated section of the site does not pose a health risk to the ongoing commercial/industrial use of the site. The auditor considers that sufficient information has been provided by the consultant...to demonstrate that the remediation works conducted at the site have removed the contaminated soil associated with the former UST, such that there are no unacceptable risks posed to the commercial/industrial occupants by the residual use of the former UST at the site." 67No evidence was adduced from Douglas Partners Pty Limited and it appears no report from it has been served as part of AET's evidence in the 2012 proceedings. Given that AET has served its evidence on the 2012 proceedings and that apart from an inadmissible hearsay statement that evidence appears to contain no evidence that the site was not remediated to the satisfaction of its then consultant, there is a serious question to be tried as to whether AET is entitled to call on the bank guarantee for breach of clause 21.1. 68Other questions were raised about the construction of clause 21. Universal contended that clause 21.5 provided the exclusive remedy for a breach of the clause so that the lessor can only recover expenses actually incurred by it in remediating and reinstating the land and making any good the damage. It says that that has not been done and therefore AET was not entitled to relief or to call on the bank guarantee. 69A further question was raised as to whether there was a sufficient compliance with the lessee's obligations under clause 21 if the land had been remediated only so that it could be used for commercial or industrial purposes if there was nonetheless a residual level of contamination. 70It would be inappropriate for me to express an opinion on these questions which will fall for determination in the 2012 proceedings. The resolution of those questions may require construction of clause 21 against an objective matrix of facts which was not before me. 71I am satisfied that there is a serious question to be tried as to whether Universal is in breach of clause 21 of the lease. It was common ground that there is also a serious question to be tried as to whether Universal was in breach of clause 8.8 of the lease requiring delivery up of the premises duly repaired and maintained, fair wear and tear accepted. 72To obtain an interlocutory injunction to restrain AET from calling on the bank guarantee, Universal must show that the damages for the alleged breach of a negative stipulation in clause 19.4 would not be an adequate remedy (Lucas Stuart v Hemmes Hermitage at [5]-[7]). 73According to AET's audited accounts for the year ended 30 June 2013, it had net assets of $33,029. AET however is a trustee. It is said that it holds the land at Macquarie Park as custodian for Hyperion Properties Syndicates Limited which in turn is a responsible entity of a managed investment scheme. Prima facie, AET would be entitled to be indemnified out of the assets of the trust, that is the managed investment scheme, in respect of liabilities it properly incurred in discharge of its functions as trustee. There is nothing to suggest that it would not be entitled to such an indemnity if it were liable to pay damages or to make restitution to Universal if it received payment under the bank guarantee but it was ultimately found that Universal had not been in breach of the lease. 74The question then is what is the value of that right of indemnity? The audited accounts for the trust as at 30 June 2013 indicated trust liabilities of approximately $6,140,000. This included a provision of $893,000 as a cost of site remediation. 75This was described as a provision for the management of remaining contamination of the site. The assets of the Trust are said to be $6,667,000 but this included a sum of $6,600,000 as the value of the subject land. 76A later valuation as at 27 September 2013 stated that the land had a market value of $5.5 million if free of contamination or $4 million having regard to existing site contamination. 77The inquiry as to the agency of damages as a remedy assumes that AET is not entitled to call on the bank guarantee because Universal is not in breach of the lease. 78If that were the conclusion at the final hearing, it does not appear that AET's right of indemnity out of the trust assets to meet its liability to pay damages or to make restitution would be sufficient to provide it with the funds to pay damages or make restitution. If the bank guarantee were called on and AET spent the money as it evidently proposes to do on site remediation, but it was held at a final hearing that Universal was not in breach of the lease, then it appears likely that AET would not be able to meet an award of damages for restitution. 79That would be especially so as on that scenario AET would presumably also be liable to pay the costs of the 2012 proceedings. 80I conclude that damages are unlikely to be an adequate remedy if it were ultimately held that AET was not entitled to call on the bank guarantee. This is the governing consideration also when deciding where the balance of convenience lies. 81I am not in a position to assess the strength of AET's claim in the 2012 proceedings, although I have observed the absence of evidence tendered on this application concerning the state of satisfaction of the consultant retained by it at the conclusion of the lease. 82The question is where the greater risk of injustice lies if an interlocutory injunction is granted, but it is found ultimately that AET was entitled to call on the bank guarantee, compared with the position if the injunction were refused and the bank guarantee is called on, but it is ultimately held that it should not have been called on and the moneys received should be repaid. 83It does not appear that there is any particular urgency in relation to the doing of the work for which the moneys under the bank guarantee are presumably required. The position has been ongoing since 2009. The 2012 proceedings have been on foot for a considerable time. 84There was a delay in those proceedings. The delay appears to have been substantially attributable to AET's obtaining extensions of time for the service of its evidence. It can reasonably be expected that those proceedings should be ready for hearing in the not too distant future after Universal has served its evidence, which it is required to do early next year. 85AET's position is protected by the usual undertaking as to damages which has been proffered by the second plaintiff, Telstra Corporation Limited. 86There is no question as to the adequacy of that undertaking. I consider that the balance of convenience favours the continuation of the injunction. 87For these reasons I have determined that the injunction which has been continued until further order should not be discharged. 88I think that prima facie AET should pay the plaintiff's costs of the application for injunctive relief, but I will hear the parties on costs and also on what directions should be made for the further progress of the matter. [Parties address on costs.] 89I order that the defendant pay the plaintiff's costs of the application for interlocutory injunctive relief. 90I further order that proceedings 2013/363434 be transferred to the Common Law Division to be heard with proceedings 2012/348176 and that the evidence in one be evidence in the other. 91I stand proceedings 2013/363434 over to 2 April 2014 before the Registrar in the Common Law Division. 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: 25 February 2014