Australia: The right to call an unconditional bank guarantee – do you say it best when you say nothing at all?

CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [2017] WASC 112 has confirmed that a principal may have recourse to an unconditional bank guarantee without needing to show an express or implied contractual right to call on the security.

The conventional view in Australia is that an unconditional bank guarantee provided to secure performance of a contract operates autonomously – that is, a principal may make a call upon it unless: (1) the recourse is fraudulent; (2) the recourse is unconscionable; or (3) the recourse would breach an express or implied restriction in the contract (Clough Engineering Ltd v Oil & Natural Gas Corp Ltd (2008) 249 ALR 458).

This generally accepted position was called into question after the ACT Supreme Court decision in Walton Construction Pty Ltd v Pines Living Pty Ltd [2013] ACTSC 237 (Walton), in effect, put the onus on the principal to identify an express or implied right in the underlying contract to call on the security.

The 20 April 2017 decision by Justice Le Miere of the Western Australia Supreme Court in CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [2017] WASC 112 is significant as it has re-confirmed the conventional position and makes no mention of the case of Walton.

CPB Contractors seeks an interlocutory injunction

CPB Contractors Pty Ltd (CPB) was concerned that JKC Australia LNG Pty Ltd (JKC) was going to call an unconditional bank guarantee to satisfy a demand by JKC for liquidated damages of $39.225 million. The bank guarantee was provided by CPB to JKC under a subcontract between CPB and JKC relating to onshore buildings associated with the Ichthys LNG Project (JKC is the head contractor to Inpex Australia on the Ichthys LNG Project for onshore works). CPB sought to prevent any call by seeking an interlocutory injunction to restrain JKC.

Article 35 of the relevant subcontract requires CPB to provide irrevocable guarantees. The pro-forma bank guarantee annexed to the subcontract provides in part:

"2. The Financial Institution hereby irrevocably and unconditionally undertakes to pay to the Contractor, forthwith upon written demand from the Contractor, any amount specified in such demand, which when aggregated with all such amounts previously paid under this document does not exceed the Guaranteed Amount.
3. The Financial Institutions' obligation to make payment under this document shall arise on receipt of a demand without proof of any breach or any other conditions and notwithstanding any contest or dispute by the Subcontractor. The Financial Institution shall not be required or permitted to make any other investigation or enquiry or notify the Subcontractor prior to the satisfaction of the demand."

The dispute concerned the proper construction of Article 35.3, which provides:

"(a) [JKC] may have recourse to the Bank Guarantee(s) at any time in order to recover any amounts that are payable by [CPB] to [JKC] on demand.
(b) [CPB] waives any right that it may have to obtain an injunction or any other remedy or right against any party in respect of [JKC] having recourse to the Bank Guarantee(s)."

Justice Le Miere found that the requirements for a grant of injunction were not satisfied, in that:

  • CBP had not made out a prima facie case that JKC is not entitled to call on the bank guarantees; and
  • the balance of convenience did not favour the grant of an injunction.

JKC was entitled to call upon bank guarantee: no negative stipulation

CPB argued that Article 35.3 of the subcontract contains an implied negative stipulation that JKC will not call upon the bank guarantees until it has been objectively determined (by agreement or arbitration under the dispute resolution process set out in Article 57) that JKC is entitled to payment from CPB of the amount claimed by JKC on demand – that is, the "amount must be actually or indisputably payable".

Justice Le Miere held that there is no such implied negative stipulation in Article 35.3(a). He found that a negative stipulation which required JKC to establish by arbitration or agreement that the amount demanded is actually, objectively or indisputably payable "would defeat the purpose of the Bank Guarantee provisions in the Subcontract".

Justice Le Miere applied the conventional approach to determining a principal's recourse to unconditional bank guarantees by construing the subcontract as a whole and considering the terms of the security itself, and found that factors weighing against restricting the recourse to when the amount is "actually or indisputably payable" included:

  • Article 35 requires the bank guarantee to be "payable on first demand";
  • Article 35.1(a)(iii) requires that the bank guarantee contain an "unconditional and irrevocable undertaking" by the bank to pay to JKC the amount of security "on demand without notice being given to CPB";
  • the proforma bank guarantee provides that the bank irrevocably and unconditionally undertakes to pay JKC "forthwith upon written demand from [JKC] any amount specified in such demand" and "without proof of any breach or any other conditions and notwithstanding any contest or dispute";
  • Article 35.3 provides that CPB could have recourse to the guarantees at "any time" and "on demand"; and
  • Article 35.4(a) provides that if JKC calls on the security at any time the balance of the proceeds after deducting amounts due and payable to JKC by CPB must be deposited by JKC into an interest bearing bank account.

Purported waiver of right to an injunction void

The Court also examined whether Article 35.3(b) is unenforceable.

Justice Le Miere held that the waiver is void as an "impermissible ouster of the jurisdiction of the court" (even though the parties had agreed that it should be read down to avoid that result). He observed that the waiver, if lawful, would take away from CPB "its right to enforce all and any rights it may have in respect of JKC having recourse to the Bank Guarantees", including CPB's right to restrain JKC from having recourse to the Bank Guarantees unlawfully and CPB's right to obtain damages in respect of such a breach of contract.

Justice Le Miere's decision emphasises the risk associated with an overly-ambitious approach to protecting the principal.

Balance of convenience favoured recourse to bank guarantee

Justice Le Miere's findings against CPB on the prima facie case meant that it was not necessary to consider the balance of convenience. Notwithstanding this, he noted that the bank guarantees are a risk allocation device and that the balance of convenience favoured the refusal of an injunction as:

"The purpose of the Bank Guarantees, and the provisions in the Subcontract relating to them, would be defeated if JKC is restrained from calling on the Bank Guarantees until the dispute concerning extensions of time and liquidated damages has been resolved by arbitration."

A good result for principals

Justice Le Miere's decision in CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [2017] WASC 112 is consistent with the conventional approach for determining a principal's recourse to unconditional security, that is, a principal's recourse to unconditional security is truly unconditional unless it is affected by fraud or unconscionable conduct, or the contract contains a relevant negative stipulation. The decision represents a very different approach from the ACT Supreme Court decision in Walton.

Justice Le Miere's decision was subsequently the subject of urgent application in the WA Court of Appeal on 26 April 2017. President Buss and Justice Murphy found reasonable prospects of success of CPB's pending appeal on 27 April 2017 and granted the injunction pending determination of the appeal. All eyes will be on the WA Court of Appeal later this month when the appeal is heard on 25 May 2017.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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