Terminating a contract can be as awkward and confusing
as a break up – except rather than saying "It's not
you, it's me", in contractual bust ups it is more like
"It's not me, it's you!".
Performance bonds such as bank guarantees and letters of credit
are supposed to make the whole process easier but you can still
easily find yourself tied up in the courts. In Lucas Drilling Pty
Limited v Armour Energy Limited it was the Queensland Court of
Appeal's turn to clean up the mess.
Lucas was a drilling contractor hired by Armour. Armour had to
obtain a bank guarantee of $750,000 when the parties entered into a
drilling contract, on terms that if Armour failed to pay an
undisputed invoice then Lucas could call on the bond. If the
contract was terminated Lucas had to return the bond to Armour.
Armour became unhappy with Lucas' performance and terminated
the contract under the default provisions. At the time Armour owed
Lucas $1.2 million. When Lucas called on the bond, Armour commenced
proceedings to restrain Lucas.
Armour argued that any right that Lucas had to call on the bond
expired on termination, so it had to return it to Armour. Lucas
argued that, at the time of termination, it had accrued rights in
respect of the bond since there were unpaid amounts owed by Armour,
and those rights did not die with the contract. The court agreed
and ordered the bond to be paid to Lucas.
The decision churned out a number of pretty important principles
for parties to commercial agreements involving performance
Terminating for breach doesn't mean that the contract never
happened; accrued rights generally survive termination. We think
you should ensure your contract has a survival clause to clarify
which provisions are intended to remain in force after
Performance bonds were once considered to be "as good as
cash". If you want to put restrictions on a party's
ability to call on a bond then be very clear about it.
Contracts need to be actively managed rather than put in a
drawer after signing. Things change, and you need to be on top of
your rights and obligations at all times.
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quite proud of it really.
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We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
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