Walton Construction (Qld) Pty Ltd & Anor v Venture Management Resources International Pty Ltd & Anor [2010] QSC 31

A recent decision of the Supreme Court of Queensland makes it clear that cashing an unconditional bank guarantee is not always straight forward, depending on the wording of the construction contract which refers to bank guarantees or other security.

In the case in question a progress payment certificate was issued by the superintendent certifying that $1.6 million was due to be paid by the contractor to the principal. In arriving at the $1.6 million payment to be made by the contractor to the principal, the principal's estimate of the cost to rectify work claimed to have been defectively performed by the contractor was included along with an amount for liquidated damages.

The contractor applied to the Court for an urgent injunction preventing the principal from proceeding to cash the bank guarantee, arguing that there were a number of considerations which meant that until the Court could properly consider all the issues, the principal should not be allowed to cash the bank guarantee. Those considerations included:

  • the contractor's argument that the calculation by the superintendent of the amount that the contractor should pay the principal for the principal's estimated cost of rectifying defective work performed by the contractor was not properly calculated. That was because the third party contractors who quoted to perform the rectification work had not even inspected the work, and importantly there was no evidence that any of the third party contractors were actually willing to perform the work referred to in their quotations – effectively they were not proper quotations and only estimates
  • the contractor had disputed the Superintendent's certification by referring the dispute to an expert determination and the expert determination process had not been completed, and
  • the contractor put forward evidence that if its bank guarantee was to be cashed by the principal then it would suffer "irreparable harm in respect of its reputation in the building industry".

On the hearing of the injunction application the Court granted an injunction stopping the principal from proceeding to cash the bank guarantee until there was a full hearing of all the matters argued by the contractor. The full hearing of the matter is to determine whether there should be an ongoing injunction restraining the cashing of the bank guarantee, but importantly from the contractor's point of view the principal was stopped from cashing bank guarantees until a proper consideration of those issues.

On the facts of this particular case, the contractor was able to contact its lawyers and have the lawyers apply to the Court for an urgent injunction prior to the principal getting the bank to pay the money out under the terms of the bank guarantee: The lesson is that it is very important for a contractor who knows that the principal is about to cash its bank guarantees to promptly contact its lawyers so an application for an urgent injunction can be made before the bank has paid out the money to the principal. From the principal's perspective this decision highlights the benefits in exercising any entitlement to take recourse to security without notice.

However, if it is too late and the "horse has bolted" (i.e. the principal has actually cashed the bank guarantee), there have also been cases where a Court has been prepared to order the principal to repay the monies to the contractor upon the contractor providing a replacement bank guarantee: However, that type of application also needs to be made promptly, otherwise it could be a ground for the Court refusing to exercise its discretion to make such an order.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.