Restraining a party from calling upon a performance bond or bank guarantee – difficult or not?

In CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [2017] WASC 112, Justice Le Miere dismissed an application by CPB to restrain JKC from having recourse to bank guarantees.

The case is of interest to those working in the construction industry for the following reasons:

  • The Supreme Court considered the construction of dispute resolution provisions, and clarifies when an arbitration clause will preclude court proceedings and when it will not.
  • The Supreme Court confirmed that merely to issue a notice of dispute under a dispute resolution clause will not preclude either party from exercising rights available to them under a contract.
  • The approach taken by the Supreme Court underlines the difficulty of obtaining an injunction to prevent a party from calling on a bank guarantee.

The decision was immediately appealed by CPB to the Court of Appeal.  The Court of Appeal has held that, pending determination of the substantive appeal to be heard at a later date, an interim injunction should be granted.  The decisions are discussed in detail below.

Facts

CPB was contracted to perform engineering, procurement, construction and commissioning works at the Icthys LNG Project.

CPB provided JKC with four bank guarantees.

CPB submitted a number of extension of time (EOT) claims to JKC.  JKC rejected three of the EOT claims in full and granted the remaining five.  CPB issued a notice of dispute under article 57 of the Subcontract in relation to JKC’s rejection or assessment of the claims.

JKC later wrote to CPB stating that CPB had not achieved the dates for completion and that CPB was liable to JKC for liquidated damages for approximately $39 million and demanded payment within 14 days.

CPB responded saying it had inadequate time to respond and in the meantime requested JKC to undertake not to take any adverse action or steps against CPB.  JKC declined to give any undertaking and, relevantly, did not make any threat to have recourse to the security.

The parties exchanged further correspondence regarding the bank guarantees which ultimately resulted in CPB issuing a notice of dispute in relation to JKC’s entitlement to have recourse to the bank guarantees.  Again, JKC did not actually threaten CPB with recourse to the bank guarantees.

Notwithstanding the absence of a threat from JKC, CPB applied to the court for an interlocutory injunction to restrain JKC from having recourse to the bank guarantees.

Criteria for an injunction

To obtain an injunction three criteria must be met.  The applicant must establish that:

  • there is a prima facie case that there is a serious question to be tried and a sufficient likelihood of success at trial;
  • if an injunction is not granted, the applicant is likely to suffer injury for which monetary damages will not be an adequate remedy; and
  • the balance of convenience favours the granting of an injunction.

The issues

There were four key issues in the case.

The first issue was whether the parties’ arbitration agreement required a stay of CPB’s injunction proceedings in the Supreme Court on the basis that the parties had agreed to an arbitration regime to resolve all disputes under the contract.

The second issue was whether article 35.3(b) was legally invalid on the basis it improperly “ousted” the jurisdiction of a court.  Article 35.3(b) stated:

"Subcontractor waives any right that it may have to obtain an injunction or any other remedy or right against any party in respect of Contractor having recourse to the Bank Guarantee(s)."

The third issue was whether article 57, the dispute resolution procedure, required the injunction to be granted because the dispute about the proper construction of article 35.3(a) was the subject of CPB’s notice of dispute.

The fourth, and central issue, was the proper construction of the article 35.3(a) of the Subcontract which stated:

"Contractor may have recourse to the Bank Guarantee(s) at any time in order to recover any amounts that are payable by Subcontractor to Contractor on demand."

CPB argued that the words “are payable” meant that the amount had to be determined as being payable by a court or arbitrator.  If CPB was correct, then JKC would not be able to have recourse to the bank guarantees as the amount demanded for the liquidated damages had not been relevantly determined as payable to JKC.

Decision

Issue 1: whether the Supreme Court injunction proceedings had to be stayed given the arbitration clause.

The Court found that the injunction proceedings were not required to be stayed under section 7(2) the International Arbitration Act 1974 (Cth) because the arbitration clause in the contract made it clear that neither party was prevented from applying to a court to seek urgent relief, including for an injunction. His Honour accepted that CPB’s application was “urgent” within the meaning of the clause.

Issue 2: whether article 35.3(b) was invalid as an “ouster” of the jurisdiction of the Court.

The general rule is that clauses which oust the jurisdiction of courts are invalid.

The Court held that article 35.3(b) did oust the jurisdiction of the Court as it took away any and all rights.  Justice Le Miere stated at [56]:

"In this case Article 35.3(b) takes away from CPB its right to enforce all and any rights it may have in respect of JKC having recourse to the Bank Guarantees.  The provision takes away not only CPB’s right to obtain an injunction to restrain JKC from having recourse to the Bank Guarantees unlawfully but also CPB’s right to obtain damages, or any other remedy, in respect of JKC’s breach of contract in having recourse to the Bank Guarantees in breach of the relevant terms of the Subcontract. The provision takes away CPB’s right to compel performance of JKC’s contractual obligations in respect of having recourse to the Bank Guarantees."

Accordingly, it was void.  The effect was that CPB did have the right to apply for the injunction.

Issue 3: whether CPB raising of the guarantees in a notice of dispute precluded JKC from calling on the guarantees.

CPB argued that, given a notice of dispute had been issued by it about JKC’s entitlement to have recourse to the security, that issue was required to be resolved through arbitration and, in the meantime, JKC could not call upon the bonds.

This argument was rejected on the basis that there was nothing in the dispute resolution provisions restraining JKC from exercising any of its rights under the Subcontract by virtue of CPB issuing a notice of dispute.

It was held that “JKC may exercise any rights it has under the Subcontract unless and until it is restrained from doing so by an order of a court or arbitrator notwithstanding that CPB has invoked the dispute resolution process”.

Issue 4: proper construction of article 35.3(a).

CPB argued that:

  • on its proper construction article 35.3(a) contains an implied negative stipulation that JKC will not demand payment under the bank guarantees unless objectively an amount is payable by CPB to JKC on demand;
  • an amount would only be objectively payable on demand where the parties agree that an amount is payable, or an arbitrator has determined an amount is payable;
  • no amount is payable by CPB to JKC on demand.

The Court rejected CPB’s proposed interpretation of the contract, pointing to various considerations including the following:

  • The bank guarantees, on the proper construction of the contract, were a “risk allocation device”, whereby CPB had agreed that JKC could have recourse to the guarantees before the final outcome of a dispute was known.
  • If CPB’s construction were to be accepted (namely requiring in effect an arbitrator to determine what was payable first), it would have defeated the purpose of these provisions of the Subcontract.

Finally, it should be remembered that JKC never actually threatened to have recourse to the security.  It certainly did not slip by Justice Le Miere.  In reference to CPB’s argument His Honour stated, “[i]ndeed, it is hard to see how CPB could advance such a case when JKC has not made or threatened to make such a demand”.

The appeal to the Court of Appeal

CPB appealed to the Court of Appeal contending, as it did in the primary decision, that JKC is only entitled to call on the security to satisfy a liquidated damages claim if the amount is “actually, objectively and indisputably” payable by CPB, such as where the amount is admitted by JKC or has been determined pursuant to the arbitral process under the subcontract.

CPB further brought an application in the appeal for an injunction pending the determination of the appeal.

CPB’s application was heard on an urgent basis on 26 April 2017.  The Court of Appeal, accepting that there was a risk that the appeal would be rendered nugatory if an injunction was not granted, granted an injunction pending determination of the appeal on 25 May 2017.

The effect

Whilst Justice Le Miere did not grant CPB’s injunction in the first instance, the Court of Appeal has granted a temporary injunction (at least until the appeal is finally determined on 25 May 2017).  This is so the matter is able to be fully and properly argued before it.

Lavan will issue an updated note once the Court of Appeal decision is handed down.

Want to know more?

Lavan’s Construction and Infrastructure team is experienced in dealing with disputes relating to construction contracts and can assist at any stage of a project to help you achieve a commercial outcome.

Contact

If you have any queries regarding this article or your construction contract, please feel free to call a member of Lavan’s Construction and Infrastructure team.