Security under the contract between drilling company and energy
Lucas Drilling Pty Limited entered into a contract with Armour
Energy Limited pursuant to which Lucas agreed to provide oil and
gas drilling services to Armour.
Clause 7 of the contract relevantly provided that the undisputed
portion of an invoice was payable by Armour within 14 days of issue
by Lucas. Any dispute of any item invoiced must be notified by
Armour to Lucas within 14 days, otherwise it will be deemed to
accept the invoice.
Clause 19.2 of the contract provided that in the event Armour
has not paid a payment that it is obligated to pay under the
contract and Lucas has provided seven days' written notice that
it intends to make a demand under the performance bond, then Lucas
may make a demand on the performance bond and apply it against any
amount of a valid invoice which is undisputed by Armour.
Clause 19.3 of the contract provided that Lucas must, subject to
any rights it may have in relation to the performance bond, return
the performance bond to Armour within three days after the
termination of the contract.
Pursuant to the contract, Armour procured a bank guarantee in
favour of Lucas.
Invoices from Lucas unpaid and contract terminated by
On 27 July 2012 and 13 August 2012, Lucas submitted two invoices
to Armour which were not paid and were undisputed.
On 29 August 2012, Armour gave notice of termination of the
contract. Later that same day, Lucas sent Armour a "Notice of
Intention" pursuant to clause 19.2, providing notice that it
intended to make a demand under the performance bond in respect of
the unpaid invoices.
On 7 September 2012, Armour sought an interlocutory injunction
to restrain Lucas from calling on the performance bond. The primary
judge granted Armour the interlocutory relief sought.
Accrued right to recourse to security prior to termination
Lucas appealed the decision. The issue before the Court of
Appeal was whether the primary judge erred in the exercise of the
discretion to grant such interlocutory relief. In determining this,
the Court of Appeal examined the proper construction of clauses
19.2 and 19.3.
Clough set out that a court will not interfere with a
party's right to call on a bank guarantee unless there is
fraud, unconscionability or an unqualified promise to pay. The case
also emphasised that the primary focus will always be the proper
construction of the contract.
Both Lucas v Armour and Southern Cross turned
on the issue whether, on the proper construction of the contract, a
party is entitled to issue a notice of intention to have recourse
to security after termination of the contract. Southern
Cross held that:
where a contract is terminated, the parties do not lose rights
already unconditionally acquired.
where one party to a contract terminates for breach of
contract, accrued rights are preserved.
upon a proper construction of the contract, the giving of the
notice was not a condition precedent to the accrual of the right.
It was merely the manner in which the right was to be
Lucas not required to return performance bond to Armour
Applying Southern Cross, the Court of Appeal held that
the giving of the notice under clause 19.2 was not a condition
precedent to the accrual of the right to have recourse to security,
but was merely the manner in which the right was to be
Thus, it did not matter that Lucas did not give notice of its
intention to have recourse to the security until after termination.
The issue was whether Lucas had accrued the right to have recourse
to the security prior to termination of the contract.
In this case, both parties agreed that both invoices were
undisputed. Thus, Lucas accrued rights in relation to the
performance bond when Armour failed to pay the invoices, prior to
the termination of the contract.
Hence, the termination by Armour did not preclude Lucas giving
the notice of its intention to make a demand under the performance
bond after termination of the contract. Accordingly, Lucas was not
required to return the performance bond pursuant to clause
On 12th November 2016, new laws will commence to protect small businesses from unfair terms in standard form contracts.
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