Australia: Unconditional bank guarantee prevails again: Telvant Australia Pty Ltd v Acciona Infrastructure Australia Pty Ltd

Last Updated: 19 October 2016
Article by Scott Alden and Jarrad McCarthy (formerly with Holding Redlich)
Most Read Contributor in Australia, September 2018

In the recent case of Telvant Australia Pty Ltd v Acciona Infrastructure Australia Pty Ltd [2016] QSC 201 the Court again upheld the validity of an unconditional bank guarantee, and the head contractor's right to call on the guarantee, despite a challenge by the subcontractor.

Facts

In this case an interlocutory injunction application was brought by Telvant Australia Pty Ltd ('Telvant') seeking to restrain Acciona Infrastructure Australia Pty Ltd ('Acciona') from demanding or receiving payment under an unconditional bank guarantee. As is frequently the case with interlocutory injunction applications, the Court's decision turned on whether there was a serious question to be tried and whether the balance of convenience favoured the granting of an interlocutory injunction.

Acciona formed a joint venture, known as the Transcity Joint Venture ('Transcity') for the construction of a road in Brisbane. Telvant was a subcontractor of Transcity engaged to complete part of the tunnel works on the road project. The subcontract required Telvant to give Transcity two unconditional undertakings as security for the performance of their obligations. Clause 2.6(f) set out that Transcity may:

"...have recourse to any unconditional undertaking provided at any time to the extent of any bona fide claim notified in writing by Transcity to the Subcontractor."

Of particular importance was clause 2.6(g) which noted that:

"The Subcontractor must not take any steps to injunct or otherwise restrain:
  1. any issuer of any unconditional undertaking;
  2. Transcity from taking any steps for the purposes of making a demand under any unconditional undertaking;
  3. Transcity using the money received under any unconditional undertaking,
except to the extent that Transcity fraudulently or unconscionably takes any steps for the purpose of making a demand under any unconditional undertaking."

The bank guarantee for $882,495 was provided by Telvant. Work on the project was purportedly completed and the tunnels opened to traffic on 24 June 2015. On 20 July 2016, Acciona informed Telvant that they had nine breach of contract claims against them arising from defective works under the contract. Acciona sent a letter to Telvant in which it demanded $1,285,926.22 as a result of the losses caused by Telvant's breaches of the Subcontract.

On 21 July 2016, Acciona attempted to call upon the guarantee to recover the losses it had incurred. On 22 July 2016, the originating application was filed and an undertaking was given by Acciona that no further steps would be taken to demand or otherwise call on the guarantee. Telvant alleged that the breach of contract claims were unsubstantiated however Acciona maintained the claims were bona fide and consequently relied on clause 2.6(g) to negate the claims of Telvant.

Decision

Telvant submitted that the guarantee could not be called on as Acciona did not have a bona fide claim that was notified in writing. This argument was dismissed as it found that the right to recourse of a bank guarantee depends on the proper construction of the terms of the contract rather than any descriptions given by judges in other cases.

In construing the contract between the parties, Jackson J highlighted that:

  • the undertaking given was unconditional;
  • the respondents had a right of recourse at any time, and
  • recourse was only limited to the extent that a bona fide claim must be notified in writing and that Telvant must not take fraudulent or unconscionable steps.

In reaching a decision, the Court held that the case does not turn on the meaning of 'bona fide', as the parties had expressly agreed to a clause restricting the opportunity to enjoin, or otherwise restrain, Acciona' s rights unless fraudulent or unconscionable steps were taken. The Court held that fraudulent or unconscionable conduct was that which is dishonest or has no reasonable basis and, given that there was no evidence of such conduct in this case, the contractual provisions applied. Although the Court found substance in Telvant's position that the claims by Acciona were not substantiated, there was no indication that they were fraudulent or unconscionable. As such, the parties were bound by the contractual terms which they had agreed to.

Lesson Learned

  • The terms of an agreement can often be the determining factor in where the balance of convenience lies in an interlocutory injunction application. Even though the Court recognised that Acciona perhaps overstated some of its claims for loss, the express clause in the contract limiting the ability to enjoin or otherwise restrain Acciona was binding.
  • The existence of the clause restricting the ability to enjoin or otherwise restrain led to the dismissal of the interlocutory proceedings as there was accordingly no serious question to be tried.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

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