Australia: The enforceability of "no injunctions clauses" against the party holding performance security

Introduction

Where a contractor is required to provide performance security to a principal in connection with a construction contract, regardless of the form of that security, many principals also seek the inclusion of a term that the contractor must not injunct or restrain the principal from having recourse to the security, or the funds resulting from the conversion of the security to cash ("no injunction clause").

The law in Australia is unsettled as to whether such a provision amounts to an ouster of the Courts' jurisdiction (and is therefore void for public policy) or is enforceable. This article includes a discussion of the most significant decisions on this issue and includes recommendations to enhance enforceability.

Summary

There are two key cases which consider whether a no injunctions clause will be enforceable. In the first case, Anaconda Operations Pty Ltd v Fluor Daniel Pty Ltd [1999] VSCA 214 ("Anaconda"), the Victorian Supreme Court of Appeal left open the possibility that a no injunctions clause may be invalid, but did not determine the issue. In the later case of Bateman Project Engineering Pty Ltd v Resolute Ltd (2000) 23 WAR 493 ("Bateman"), the Western Australian Supreme Court did find that a no injunctions clause was invalid on the basis that it ousted the jurisdiction of the Court and severed it from the contract.

While these decisions support the view that a no injunctions clause may be invalid, arguments can be made for why no injunctions clauses should be binding and enforceable, including the commercial nature of construction projects and the public interest being advanced by upholding the parties' bargain.

General prohibition on ouster clauses

Clauses ousting the Courts' jurisdiction are usually found to be void on the basis of being against public policy. In Dobbs v National Bank of Australia Ltd¹, the High Court held:

No contractual provision which attempts to disable a party from resorting to the Courts of law [is] recognised as valid. It is not possible for a contract to create rights and at the same time to deny to the party in whom they vest the right to invoke the jurisdiction of the Courts to enforce them².

However, as noted above, the law in this area with respect to no injunction clauses is unsettled.

Why is this issue relevant?

In the recent decision of the Queensland Supreme Court in Ceresola TLS AG v Thiess Pty Ltd and John Holland Pty Ltd³, Daubney J refused to grant Cerasola (the Applicant) an interim injunction to restrain TJH from having recourse to a bank guarantee which the Applicant had provided. This case reinforces the 'general rule' from Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd⁴ that absent fraud, unconscionable conduct or a clear contractual condition precedent to recourse which has not been satisfied, a Court is unlikely to restrain a bearer of an unconditional bank guarantee from having recourse to that security. Although the contract in this case did not contain a no injunctions clause (precluding Ceresola from applying for an injunction), the case highlights that the presence of such a clause would be central to the general issue of when a bearer of security can have recourse to that security, and the continued willingness of parties to seek injunctions against calls in draw downs from performance security.

The Anaconda case

The Anaconda case addressed performance security of $45.15 million procured by the contractor pursuant to a design and construction contract in excess of $900 million for a nickel and cobalt extraction plant in the Murrin Murrin area of Western Australia. The principal had asserted defective work by the contractor in what Brooking JA described as "one of the more notable features of the plant", and had made a call under the performance bonds. The call had been met by the issuer, and as a result of earlier Court orders was frozen so that the principal was restrained from applying the proceeds of the call (pending further trial).

The Anaconda contract included a no injunction clause (clause 4.3(c)) in the following terms:

The Contractor accepts that the [Principal] may call upon the Approved Security at any time and the Contractor shall not seek an injunction against either the [Principal] or the issuer of the Approved Security preventing a demand on payment under such security.

The contract did not contain an enabling stipulation which could have been "put forward as having a negative effect by prohibiting conversion in all circumstances other than those specified,"⁵ such as prior notice of recourse. The Court also stated that there was "no express prohibition or restriction on the calling up of the security."⁶ After referring to the difficulties of establishing an implied restriction on the calling up of any security, the Court went on to find that:

[t]he present case is entirely clear. For cl4.3(c) is an express provision negativing any prohibition or restriction: the contractor accepts that the [principal] may call upon the security at any time and agrees not to seek an injunction to prevent a demand for payment. It matters not that it may be argued that the latter part of this provision is bad as ousting the jurisdiction of the courts. The important thing is that both parts of it show an intention that the [principal] is to be at liberty to call on the security at any time. It is difficult to imagine a more clearly expressed intention. And so the present contract not only fails to displace, but clearly reinforces what might be called the prima facie position.⁷

The terms of the Anaconda contract (which was not based on a standard form) were unique, and it is principally as a result of this that the above conclusion can be reached. Most construction and engineering contracts include preconditions on the principal's right of recourse to performance security such as the requirement to give a number of days prior notice, or only where there has been material non-compliance by the contractor of any of its obligations under the Contract.

As noted above, the Court held there was "no express prohibition or restriction on the calling up of the security."⁸

Some commentary has concluded that this case is authority for the position that where the parties expressly agree to include a no injunctions clause then a party will be prevented from seeking an injunction.⁹ However the relevant section of the judgment could equally be interpreted as referring solely to whether there is any further implied term prohibiting or restricting recourse to security or dealing with the proceeds of such recourse.

On this reading, the statement "[i]t matters not that it may be argued that the latter part of this provision is bad as ousting the jurisdiction of the Courts"¹⁰ is not indicating that in all cases, the agreement of the parties to include a no injunction clause is paramount to its possible exclusion on grounds of public policy. Instead, its interpretation may be that the inclusion of a no injunctions clause shows an intention of the parties to permit the principal unfettered access to the performance security, without the need to imply any prohibition or restrictions into the mechanism for recourse and dealing with performance security.

The Anaconda case was heard in urgent circumstances on extremely short notice just prior to the end of the Court's term. Brooking JA highlights in his judgement that the reasons may therefore be either too diffuse or brief.¹¹ In that context, it is not surprising that the above particular comment is now the subject of further discussion.

The Bateman case

In the Bateman case, the principal entered into a design, engineering and construction management contract with the contractor to develop a laterite nickel and cobalt mine approximately 30 kilometres from Kalgoorlie in Western Australia.

The security the subject of the dispute was a bank guarantee of $5 million. Under the contract, the parties were to share the risk or rewards of cost overruns or underruns. The principal claimed against the contractor the amount of $5 million for cost overruns, advising the contractor that if the claim was not resolved within the time provided for under the contract, the principal would proceed to convert the security for the amount claimed. In response, the contractor applied to the Western Australia Supreme Court for an interlocutory injunction restraining the principal from calling on the security.

The Bateman contract included a no injunctions clause in the following terms:

the [principal] shall be entitled to proceed with the conversion of the security for the amount claimed and the [contractor] shall not hinder, obstruct, restrain or injunct the Principal from so doing and the [contractor] will not exercise [their] rights under Clause 32 [Disputes Settlement] prior to the [principal] drawing down the securities.

The Court had to determine, among other things, whether the no injunctions clause "ousts the jurisdiction of the Court and is therefore invalid and unenforceable."¹² The Court reviewed the legal principles regarding ouster of jurisdiction¹³ and held that the no injunctions clause "is an ouster of the jurisdiction of the Court and is void as being against public policy."¹⁴

Reasoning in the Bateman case

His Honour Justice Owen noted the distinction between clauses which affect the existence of a right and those which merely affect the enforcement of a right.¹⁵ Clauses which affect the existence of a right have the potential to be characterised as an ouster of the Courts' jurisdiction and therefore invalid. By contrast, clauses which affect the enforcement of a right, for example clauses which delay but do not defeat access to the Courts, will not typically operate as an ouster of jurisdiction.¹⁶ As the no injunctions clause in Bateman defeated the contractor's right to ensure that the principal could only have recourse to the guarantee "in strict accord with the relevant terms of the Contract," it was held to be invalid.

Justice Owen considered the no injunctions clause "in the context of the whole Contract" and by reference to "the overall relationships between the parties".¹⁸ He explicitly acknowledged that this case "depends on its own circumstances". His Honour observed that the contractual clauses dealing with security were important to the contract as a whole and that the no injunctions clause placed a "substantial fetter" on the contractor's rights.²⁰ This reasoning indicates that clauses ousting the Courts' jurisdiction to adjudicate on important legal rights, as viewed in the overall context of the contract, are likely to be invalid.

Effect of finding that a clause is an ouster of jurisdiction

A finding that a clause is invalid as against "public policy does not mean that the entire clause falls away".²¹ In Bateman, specific parts of the no injunctions clause remained valid. Specifically, the requirement that the contractor not 'hinder' or 'obstruct' the owner's recourse to the security remained valid. This was because these parts of the clause were "not, in substance, so connected with the other parts of the clause that to remove...[them] would alter the nature of what remains."²²

Conclusion

The law on whether no injunctions clauses are invalid as an ouster of the Courts' jurisdiction is unsettled. Especially for so long as Bateman is not overruled (noting that it is a decision of a single judge), principals should be aware that they may not be able to rely on such clauses to restrain contractors from applying to the Court for an injunction to restrain the principal's recourse to the security. Importantly for principals, parts of the no injunctions clause may remain valid. For example, an obligation imposed on contractors not to hinder or obstruct a principal's right to have recourse to the security continued to apply in the Bateman case.

As arguments can be made in favour of no injunctions clauses being valid, a Court in the future may expressly uphold the validity of a no injunctions clause. Given this, any party promising not to seek to injunct calls against performance security cannot presume that such a clause would be invalid, and must consider the implications of agreeing to be bound by a no injunctions clause, including funding the call on performance security pending the resolution of any dispute between the parties and suffering the possible reputational damage of such a call on performance security.

The result in any particular situation will depend upon the circumstances of the case, however generally the authors consider that a Court is more likely to enforce a no injunctions clause where:

• the no injunctions clause uses clear language;
• the commercial purposes and importance of the performance security to the parties is identified in the contract, including in the context of the overall terms and conditions of the contract;
• there are minimal restrictions on the principal's recourse to performance security;
• any restrictions that are included are expressed in clear language and carefully observed by the principal; and
• to the extent permitted by law, there is an exclusion of implied terms.

In summary, this is an area in which the law will likely continue to develop and one which parties should not overlook in negotiating construction contracts.

Footnotes:

¹(1935) 53 CLR 643.
²Dobbs v National Bank of Australia (1935) 53 CLR 643 at 652, as cited in Trevor Thomas, 'Expert Determination in Major Construction Disputes: Public Policy, Uncertainty and Misclassification' (2009) 25 Const. L.J. No. 7, 483, p. 485.
³[2011] QSC 115.
⁴[2008] FCAFC 136 at [77].
⁵Anaconda Operations Pty Ltd v Fluor Daniel Pty Ltd [1999] VSCA 214 at [8].
⁶Anaconda at [15].
⁷Anaconda at [15].
⁸Anaconda at [15].
⁹John B Dorter & John JA Sharkey AM, Lawbook Co, Building and Construction Contracts in Australia: Law and Practice (at January 2012) [10.390].
¹⁰Anaconda at [15].
¹¹Anaconda at [5].
¹²Bateman Project Engineering Pty Ltd v Resolute Ltd (2000) 23 WAR 493 at [19].
¹³Bateman at [21]-[22].
¹⁴Bateman at [23].
¹⁵Bateman at [22].
¹⁶Bateman at [24].
¹⁷Bateman at [23].
¹⁸Bateman at [24].
¹⁹Bateman at [24].
²⁰Bateman at [24].
²¹Bateman at [26].
²²Bateman at [26].

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.