Wood Hall Ltd v Pipeline Authority

The retention guarantees were provided as a substitute for the retention of moneys under condition G24, and the submission on behalf of the contractor was that the Authority could only demand payment under those guarantees in the circumstances in which it might have had recourse to the retention moneys themselves. However, under the contract the Authority simply retains the moneys; it does not part with them until the events specified in condition G24 occur. The arrangement made between the Authority and the contractor entitled the latter to have the retention guarantees released at the same time and under the same conditions as were specified in the contract with respect to the retention moneys, but it did not prevent the Authority from resorting to the retention guarantees in accordance with their own terms. There was nothing in the arrangement that prevented the Authority from making the demands under the retention guarantees, although once having received payment by the Bank the Authority was bound to release the moneys to the contractor at the time when the moneys that would have been retained if the retentions had been made would have been released. That time had not arrived when the present proceedings were commenced. The occasion on which the retentions in excess of $250,000 (i.e., $750,000) were to be paid to the contractor - the completion to the reasonable satisfaction of the Authority of section 2B of the work (condition G24.8) - was not far off when proceedings were commenced, but it had not then arrived.

It follows from what I have said that the Authority was entitled to demand payment when it did under both the performance guarantees and the retention guarantees. The contractor was not entitled to the relief which it sought and obtained from Rath J. It is not possible, in the circumstances, to consider whether the situation has been materially altered by the events that allegedly occurred after Rath J. had given judgment. I therefore express no view, one way or another, on the position that appears to have arisen in the present case, where the demands were made at a time when the Bank's obligation under the guarantees was still subsisting, but had not been met before the certificate of acceptance was issued. Similarly I express no opinion as to the effect of the alleged cancellation of the guarantees.

It remains to notice a final argument of a different kind advanced on behalf of the contractor. It appears that from time to time the contractor asked the Authority for early payment of claims and that the Authority acceded to some of those requests without notifying or consulting the Bank. It was argued on behalf of the contractor that the prepayment by the Authority in those circumstances constituted a variation of the contract whose performance was guaranteed by the bank guarantees and that the Bank was accordingly discharged from its liability under the guarantees, in accordance with the principle discussed in such cases as Ward v. National Bank of New Zealand [3] . For the purpose of disposing of this argument, it is unnecessary to decide whether the bank guarantees were contracts of suretyship to which this principle applies. In each of the peformance guarantees there was an express provision that the liability of the Bank should not be discharged or impaired by reason of any variation or variations in any of the stipulations or provisions of the contract or things to be done under it: cl. 3 of the performance guarantees. In any case, the contractor could have no right to claim that the early payments, made at its request and for its benefit, had the effect of avoiding the securities which it had furnished. If there was any right to treat the bank guarantees as discharged, it vested solely in the Bank but the Bank has made no objection on this ground to making payment.

For these reasons, in my opinion, the appeal should be dismissed.

This appeal concerns four documents which the appellant, a pipe-laying contractor, caused its bankers, Australia and New Zealand Banking Group Ltd., to issue to The Pipeline Authority. Their form, the circumstances in which they came to be given and the events which have subsequently led to this appeal appear in the judgment of Gibbs J.

By each of the four documents (which for convenience I shall refer to as guarantees, the name the parties gave them) the Bank "unconditionally undertakes" to pay on demand whatever amount, up to a specified amount, the Authority may demand. Consistently with their description as unconditional, these guarantees are, in themselves, entirely unqualified save only for express limitations as to their amount and duration.

The Authority made demand under each document, whereupon the contractor, in an action in the New South Wales Supreme Court against the Authority and the Bank, sought and obtained a declaration that these demands were void and injunctions restraining the Bank from "honouring" the guarantees and from paying the Authority pursuant to the demands. It also obtained other declarations and orders in its favour, including an injunction restraining the Authority from making any further demands upon the Bank otherwise than in specified events. On appeal the Court of Appeal set aside all these orders and declarations and it is from its order that the contractor now appeals to this Court.

The contractor had no prior warning of the making of demands by the Authority on the Bank. Consequently it could only institute proceedings after those demands had already been served upon the Bank although before the Bank had complied with them by paying over to the Authority the moneys demanded. Faced with that situation and with the unqualified nature of the Bank's so-called guarantees, which were on their face unqualified promises to pay on demand, only two possible contentions appear to have been open to the Contractor if it were to prevent payment being made to the Authority, with a consequential liability to the Bank being incurred by the contractor. It could seek to have implied into the Bank's guarantees some qualifications, as, for instance, a condition that the Bank should only pay upon a demand given in some circumstance which, under the terms of the construction contract, had not yet in fact arisen. It could, in the alternative, look rather towards relief directed primarily against the Authority, alleging that it was in breach of contract in making demands upon the Bank and seeking orders which would prevent effect being given to those demands.

It was upon the second of these two bases that the contractor succeeded at first instance. As to the other basis, his Honour, in the case of two of the guarantees, the performance guarantees, left open the question whether the Bank's obligation to the Authority was unqualified once a demand for payment was made. Of the other two guarantees, the retention guarantees, his Honour said that, on demand being made, an unqualified obligation to pay arose as between the Bank and the Authority. The relief which his Honour gave the contractor was, accordingly, not based upon any qualification of the Bank's absolute obligation to the Authority under the guarantees. It depended, rather, upon the view that the Authority was in breach of contract with the contractor in making the demands when it did.

On appeal, the Full Court held that the Authority was not in breach of contract and that, even if it had been, that would not entitle the contractor to a declaration that the demands were void, nor, the demands having been given, to any order restraining the Bank from satisfying the obligation to the Authority which the demands had created. Their Honours expressly rejected the notion that any qualification of the absolute obligation of the Bank to the Authority could arise either by the implication of a qualifying term or as a matter of construction.

Their Honours were, with respect, entirely correct in their conclusion that none of the four guarantees is, by any process of implication or construction, to be deprived of the unqualified operation which its express words dictate. Not only does the clear, indeed empathic, language of these guarantees preclude the introduction of any such qualification: to introduce such a qualification would be to deprive them of the quality which gives them commercial currency. Once a document of this character ceases to be the equivalent of a cash payment, being instantly and unconditionally convertible to cash, it necessarily loses acceptability. Only so long as it is "as good as cash" can it fulfil its useful purpose of affording to those to whom it is issued the advantages of cash while involving for those who procure its issue neither the loss of use of an equivalent money sum nor the interest charges which would be incurred if such a sum were to be borrowed for the purpose. Being "as good as cash" in the eyes of those to whom it is issued is essential to its function. In Edward Owen Engineering Ltd. v. Barclays Bank International Ltd. [4] Lord Denning recently described the performance guarantee as standing "on a similar footing to a letter of credit. A bank which gives a performance guarantee must honour that guarantee according to its terms. [It] must pay according to its guarantee, on demand, if so stipulated, without proof or conditions". That their constant equivalence to cash, awaiting only a demand before materializing as cash, was precisely the purpose of the guarantees in the present case clearly appears from the terms of the construction contract which here gave rise to two of them and from the dealings between contractor and Authority which brought the other two into existence.

Accordingly the Bank was, in my view, obliged to pay in accordance with the Authority's demands made under the guarantees issued to it by the Bank; it was irrelevant to the existence of this obligation on the part of the Bank whether the giving of any of those demands involved the Authority in breach of contract with the contractor.

There remains the basis upon which the trial judge did accede to the contractor's claim for relief, a basis which necessarily involves two propositions each of which was rejected in the Full Court: first, that the Authority was in fact in breach of contract as against the contractor in making those demands and, secondly, that in that event the contractor, notwithstanding demands having been made on the Bank which were effective as between it and the Authority, was entitled to such relief from the Court as would prevent the amount of the demands from passing from the Bank to the Authority.

It will be unnecessary to determine the correctness of the second proposition if the contractor fails on the first, and as to the two performance guarantees it must fail because of the terms of the guarantees themselves. These two guarantees were procured by the contractor and accepted by the Authority "by way of alternative to a cash security" pursuant to cl. G4 of the construction contract. They stood in place of cash securities and once they were tendered and accepted the relevant rights of the Authority depended upon their terms. Since their terms provided for an unqualified right to demand payment at any time, this must be taken to have represented the intention of the parties when agreeing to the substitution of these guarantees in place of payments of cash. By the arrangement as so understood the interests of both parties were advanced: the contractor deferred for the time being, and perhaps altogether, the need to make any payment of security moneys, the Authority, while thus assisting the contractor so far as the latter's liquidity was concerned, at the same time preserved to itself the right at any time, by making a demand, immediately to obtain payment of the full amount of the security moneys.

It is, then, the very nature of the performance guarantees which in their case renders unacceptable the contractor's first proposition. 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. In fact the contract is silent on the matter.

It is instructive to recall that had the parties adhered to the concept of security in the form of a cash payment, which is what cl. G4 primarily contemplates, there would be no doubt as to the position: once paid, that cash would thereafter be held by the Authority as security and it would perform that function from the moment that it was paid. It would, I think, be curious were the substitution of a guarantee for such a cash payment to affect detrimentally the secured position of the Authority. Yet this is a necessary consequence of the acceptance of the contractor's submission, since it is said that the Authority must first establish some want of due and faithful performance on the contractor's part before it may, be making a demand, place itself in as favourable a position as it would have occupied had the security originally been provided in cash. To regard this as the consequence of the giving by the contractor of the present performance guarantees, unqualified as they are in form, appears to me to be more curious still.

The retention guarantees, unlike the performance guarantees, do not depend upon cl. G4 of the contract but are related to cl. G24, concerned with retention moneys. That clause provides for no alternative, such as the furnishing of a guarantee, to the actual holding back by the Authority of portion of the moneys, described as retentions, otherwise due to the contractor; it was only by subsequent agreement of the parties that retention guarantees were substituted for cash retentions. That agreement contains no express terms restricting the making of demands. Once again, then, although in different circumstances, the contract of the parties is silent concerning the making of demand under the guarantees. Considerations not very different from those to which I have referred in connexion with the performance guarantees seem to me to make it clear that, as between contractor and Authority, demands may be made under the retention guarantees at any time and without any condition precedent being satisfied. The entirely unconditional form of the guarantees agreed upon, including their express reference to payment by the Bank "without further reference to the Contractor"; the original right of the Authority to retentions, which was only altered when, after retentions had accumulated in the Authority's hands, the contractor asked to be allowed to provide guarantees instead; the contemplation of the parties that the ultimate release of these guarantees would occur at the same time and upon the same conditions as would have applied to retentions: all this points clearly enough to this conclusion and there appear to me to be no indications to the contrary.

The Authority was, I think, entitled as against the contractor to revert at any time to the position as it originally existed by making demand under the retention guarantees. If it should do so it would, of course, then hold the moneys received from the Bank upon the same terms as if they were retentions which had been retained under cl. G24 and with which it had never parted.

It follows that in my view the Authority was entitled as against the contractor to make the demands it did; they involved no breach of contract. Accordingly I would conclude that the Full Court was correct in setting aside the order of the learned primary judge. I need, in conclusion, only add that I agree with all that Gibbs J. has said in his reasons for judgment concerning three matters: the events which are said to have arisen since the hearing at first instance, the contractor's contention that the Bank was discharged from liability by reason of the Authority having acceded to certain requests by the contractor for early payment of claims and the reasons why the recent decision of this Court in Australasian Conference Association Ltd. v. Mainline Constructions Pty. Ltd. (In liq.) [14] has no direct application to the present case.

I would dismiss this appeal for the reasons given by Gibbs J.

This appeal concerns the obligation of the Australia and New Zealand Banking Group Ltd. to pay moneys on demand to the respondent, The Pipeline Authority, in accordance with undertakings contained in documents described as "performance guarantees" and "retention guarantees" made by the Bank in favour of the Authority. The undertakings in the performance guarantees, one for $1,500,000 and another for $100,000, were in the form:

The Bank unconditionally undertakes and covenants to pay on demand any sum or sums which may from time to time be demanded in writing by Owner up to a maximum aggregate sum of one million five hundred thousand dollars ($1,500,000-00) to be held by Owner as security for and until the performance and completion by Contractor of all of the conditions of the said Contract in all respects.

The description, "Owner", is a reference to the Pipeline Authority, and the description, "Contractor", is a reference to the appellant, Wood Hall Limited, which had contracted to build a pipeline for the Authority. The undertakings in the retention guarantees were in the form:

At the request of the abovenamed Contractor and in consideration of your, at the request of this Bank, agreeing not to withhold cash retention money from payments due to the said Contractor under the abovementioned Contract, the Australia and New Zealand Banking Group Limited, unconditionally undertakes to pay on demand any sum that may from time to time be determined by you to a maximum of Seven Hundred and Fifty Thousand Dollars ($750,000-00).

The appellant's contention that some implied condition qualified the undertakings has no merit; the undertakings were made "unconditionally". The documents created unconditional obligations to pay the sums on demand. The appellant relied on Australasian Conference Association Ltd. v. Mainline Constructions Pty. Ltd. (In liq.) but that dealt with disposition by the recipient of moneys paid by a Bank under a similar document and is not in point.

The undertakings operate in the manner expressly stated. In determining the rights inter se of the Authority and the Bank under the documents, regard should not be had to any condition contained in any contract or any arrangement between the Authority and the contractor. On demand by the Authority the Bank was obliged to pay in accordance with the express terms of the undertakings.

If undertakings in this form were construed so that a Bank must or might have regard to rights and liabilities arising from the performance of a contract between an owner and a contractor before it was required or entitled to pay an owner, then the commercial effectiveness of such undertakings would be destroyed: all the legal and factual complexities of a building dispute would be injected into an otherwise straightforward unconditional undertaking.