WA Court of Appeal confirms it is not easy to prevent a party to a construction contract from pulling a bank guarantee

Earlier this year, Lavan published a case note about the WA Supreme Court decision of Justice Le Miere in CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [2017] WASC 1121, where His Honour dismissed CPB’s application for an injunction to restrain JKC from having recourse to four performance bonds.

In CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [No 2] [2017] WASCA 1232, the WA Court of Appeal dismissed an appeal by CPB from that decision.

The decision is of interest to those in the construction industry because the Court of Appeal decision confirms that:

  • It is generally difficult to obtain an injunction to prevent a party to a construction contract from having recourse to a performance bond or bank guarantee.
  • The issue of a notice of dispute and commencement of an agreed dispute resolution procedure does not cut across a party’s contractual rights to draw on a performance bond or bank guarantee before the dispute is resolved.
  • Any implied duty of a party to co-operate with respect to contractual dispute resolution does not override the express provisions of the contract.

Facts

CPB provided JKC with four performance bonds (referred to in the contract as bank guarantees) (Bonds).

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 General Condition (GC) 57 of the contract 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 Bonds.

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

CPB applied to the Supreme Court to restrain JKC from having recourse to the Bonds.  That application was dismissed.  CPB appealed to the Court of Appeal.  The Court of Appeal delivered its decision on 30 June 2017 dismissing CPB’s appeal.

Grounds of appeal

CPB appealed on various grounds, relevantly being:

Ground 1

The primary judge erred in failing to grant an injunction to restrain JKC from calling upon the Bonds while the Bond Dispute was subject to the dispute resolution process in GC 57.

Ground 2: 

On a proper construction of GC 35.3(a), JKC could only have recourse to amounts that were objectively and indisputably payable.  This required that either:

  • 10.2.1 CPB admit the monies were owed; or
  • 10.2.2 an arbitrator or a court determined that the monies were payable by CPB.

The decision

Ground 1:  Effect of the notice of dispute

The first issue to be determined was the effect of the Bond Dispute notice. 

CPB argued that if JKC exercised its right to have recourse to the Bonds after the Bond Dispute had arisen, the dispute resolution process under GC 57 would have been defeated because the Bonds would have been called and never reinstated. 

CPB further argued that in order to allow CPB to have the benefit of the contractually agreed dispute resolution process, JKC was under an implied duty to do all things necessary to enable CPB to have the benefit of that process.

The Court of Appeal rejected both these arguments.  It said that the duty to cooperate did not override the express provisions of the Subcontract.  The express provision referred to was GC 35.3(a) which provided:

(a)   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.

The Court of Appeal further held that on a proper construction of the Subcontract, the fact that a party has invoked the contractual dispute resolution procedure does not mean that the status quo must be preserved pending resolution of the dispute.

For these reasons, the Court of Appeal did not accept Ground 1.

Ground 2:  How “concrete” did JKC’s claim need to be in order to have recourse?

The proper construction of GC 35.3(a) was the central issue in the appeal.  GC 35.3 provided:

(a)  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.

(b)  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).

CPB argued that on a proper construction GC 35.3(a), an amount is payable within the meaning of that clause only if, objectively and indisputably, in the events that have happened, CPB has a contractual obligation under the Subcontract to pay that amount. 

The Court of Appeal rejected CPB’s construction and said:

In our view, on a proper construction, it entitles to the contractor to have recourse to the Bank Guarantees if at any time the contractor has an honest claim (ie a bona fide claim) in the events that have happened to immediate payment under the Subcontract.

In reaching its conclusion the Court of Appeal considered the terms of the contract as whole, including the pro forma words of the Bonds themselves.  The Bonds required the financial institution to make payment on demand by JKC without any proof of breach and notwithstanding any dispute by CPB.

In addition, the Court of Appeal looked at the significance of GC 35.3(b).  By GC 35.3(b) CPB waived any right it may have had to obtain an injunction or other remedy or right against any party in respect of JKC having recourse to the Bonds.

On CPB’s construction, JKC could only have recourse to the Bonds if the amount was admitted to be paid by CPB or adjudicated by an arbitrator to be payable by CPB to JKC. 

The Court of Appeal did not accept that construction.  It held that clause 35.3(b) would serve no purpose if CPB’s construction of clause 35.3(a) were accepted.  That is, if CPB had admitted an amount was payable or an arbitrator or Court had determined an amount was payable by CPB to JKC, there would be no need for CPB to apply for an injunction to restrain JKC from having recourse to the Bank Guarantees. 

As a side note, in the first instance decision, Justice Le Miere held that GC 35.3(b) was void as an attempt to oust the jurisdiction of the court.  The Court of Appeal took a different view to Justice Le Miere in construing GC 35.3(b).  However, the Court of Appeal did not deal with the issue of whether, on its construction, GC 35.3(b) was void.  This was because, even if void, it was still permissible to have regard to it in construing GC 35.3(a). 

The Court of Appeal looked at the terms of the Subcontract as whole in detail and ultimately concluded that Ground 2 failed.

Result

The appeal was dismissed meaning CPB did not get its injunction to restrain JKC from having recourse to the Bonds.

 

05 July 2017
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FOOTNOTES

[1] Rich text editor, editor12, Press ALT 0 for helpCPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [2017] WASC 112

[2] Rich text editor, editor13, Press ALT 0 for helpCPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [No 2] [2017] WASCA 123