A Blow To The Reputation Of Unconditional Bank Guarantees?

Construction and infrastructure contracts typically require a contractor to provide at least one unconditional bank guarantee from a reputable financial institution. A key purpose of doing so is typically to serve as a 'risk allocation device' whereby an owner may call upon the guarantees to satisfy a bona fide claim even if it is contested by a contractor^1. In this way, unconditional bank guarantees have a reputation in the commercial world as 'pay now, argue later' and are considered 'as good as cash'.

Where a contractor applies to the Court for an interlocutory injunction to restrain a principal from having recourse to a bank guarantee, the principles to be applied by the Court are relatively well settled. It requires a contractor to show that there is a serious question to be tried as to: 'the final injunctive relief claimed' and that the balance of convenience favours the grant of an injunction.

But how are these 'well settled' principles applied to an application for an injunction for breach of a contractual stipulation that is characterised as a risk allocation device? Even if there is a serious question to be tried as to the right of the owner to have recourse to a bank guarantee:

• can an owner have recourse to the security if it was required to return or reduce the security prior to foreshadowing the making of a call on security?
• does the characterisation of the security clause as a 'risk allocation device' control or determine the application of the balance of convenience, meaning that an injunction should be refused?
• is any weight to be afforded to the financial or reputational prejudice to be suffered by a contractor, if the security clause is properly construed to be a risk allocation device?

These issues were resolved by the South Australian Court of Appeal in the decision of Synergy Construct Australia Pty Ltd v GSA North Terrace Pty Ltd (atf GSA North Terrace Unit Trust) [2025] SASCA 72 (Synergy), and the subsequent decision of Justice Craig in Cobolt Constructions Pty Ltd v Duke Ventures Wellington Street Pty Ltd [2025] VSC 609 (Cobolt Constructions) which applied Synergy.

The background of the Synergy decision

In late 2019, GSA (as principal) engaged Synergy (as contractor) to construct student accommodation in Adelaide. The contract was based on the AS 4902-2000 template (Contract).

Importantly, the Contract required Synergy to provide security to GSA, which a Side Deed clarified was to be provided in three separate bank guarantees. These bank guarantees, issued by the Commonwealth Bank, provided security to GSA of just under $2 million in total.

A further side agreement of the parties, called the 'DLP agreement', provided that the three bank guarantees would be released back to Synergy upon the completion of various milestones, the first being the completion of hydro-jetting and sewer stacks works and the subsequent execution of a mutually agreed Deed of Release.

In any event, the Contract itself contained a clause providing for the return of all the bank guarantees 14 days after the issuance of a final certificate.

Disagreements arise

Synergy completed the relevant works in May 2023. However, despite doing so, Synergy refused to execute the mutually agreed Deed of Release contemplated as the first milestone, insisting that it contained amendments not previously agreed upon. Accordingly, GSA did not return the first bank guarantee.

Synergy issued a final payment claim under the Contract and requested the superintendent to issue the final certificate, which the superintendent did. The Superintendent issued a final certificate, certifying that no payment was owing to Synergy². Synergy then issued a notice of dispute under the Contract in respect of the Superintendent's assessment of its payment claim and the refusal to return the bank guarantees³.

Proceedings commenced

In 2024, Synergy commenced proceedings in the South Australian Supreme Court. Amongst other things, Synergy sought an interlocutory and permanent injunctions restraining GSA from calling on the bank guarantees and seeking that the bank guarantees be returned by GSA.

Synergy's position was that GSA was precluded under the Contract from having recourse to the bank guarantees on two grounds: first, GSA was obliged to return the bank guarantees within 14 days' following issue of the final certificate under the Contract⁴; and, secondly, it had complied with its obligations under the DLP agreement.

GSA's position, on the other hand, was that as the 'final payment claim' was issued prematurely by Synergy, the 'final certificate' issued by the Superintendent did not constitute a 'final certificate' for the purposes of the Contract. The requirement to return security under clause 5.4 of the Contract had not been triggered. GSA also disputed it was required to return any of the bank guarantees under the DLP agreement⁵.

Synergy submitted evidence as to prejudice it might suffer if GSA had recourse to the bank guarantees, including the potential impact on future cashflow for current and upcoming projects⁶.

First instance – injunction refused by Associate Justice Bochner

On 13 January 2025, the trial judge determined the application for interlocutory relief and refused to grant the injunction Synergy was seeking to prevent GSA from calling on the bank guarantees.

Her Honour found that:

• there was a serious question to be tried on a number of matters, including whether the final certificate was valid and whether GSA was obliged to return any of the bank guarantees at any time; but
• as the bank guarantees under the Contract were a risk allocation device under a 'pay now argue later' regime, the Court should enforce the contractual bargain or preserve the status quo, meaning GSA was entitled to call the bank guarantees. Her Honour followed Rees J finding in Daewoo Shipbuilding⁷ in making this finding⁸; and
• in assessing the balance of convenience, any 'prejudice' that might be suffered by Synergy 'was of a kind that was or ought to have been envisaged at the time the contract was voluntarily entered into'⁹.

Synergy appealed the decision of the trial judge.

Court of Appeal – bank guarantees and injunctive relief

The Court of Appeal described the 'essential question' for the appeal from the parties' submissions as:

whether, having concluded that there was a serious question that GSA had come under an obligation to return the bank guarantees before it had made or foreshadowed a demand on them, the judge erred by treating their character as risk allocation devices as effectively controlling the availability of interlocutory injunctive relief and as neutralising the prejudice Synergy would suffer if the injunction were refused.¹⁰

Before the Court of Appeal disposed of the appeal, it traversed the key High Court and intermediate appellate decisions on bank guarantees and injunctive relief, including Simic v New South Wales Land and Housing Corporation¹¹, Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd¹², Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd¹³, Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd14 and Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd¹⁵ and made the following key points as to the legal principles that govern an application such as this.

First, where a bank guarantee is provided under a construction contract, there are two key documents. There is: the construction contract which regulates the requirement for security as between the owner and the contractor; and the bank guarantee which 'operates as between the bank and the beneficiary' of the guarantee.¹⁶ While the 'autonomy principle' 'operates as between the bank and the beneficiary', it does not apply to an application for injunctive relief under a construction contract.¹⁷

Second, where an interlocutory injunction is sought on the basis of an assertion that the respondent would be acting in contravention of an express or implied negative promise not to present a bank guarantee in the circumstances that have occurred, an applicant must satisfy two elements:¹⁸

• that there is a serious question to be tried in respect of final relief, and such relief would be rendered 'nugatory' if the interlocutory injunction were refused. As for Synergy, it had to show 'a serious question to be tried that GSA will ultimately be permanently restrained from having recourse to the bank guarantees on the basis that GSA would be in breach of contract by doing so.' As an injunction is sought in equity, Synergy also had to show that damages would be an inadequate remedy for the 'breach of contract sought to be restrained.' and
• 'that the balance of convenience favours granting an injunction. This involves weighing the prejudice to the applicant if the status quo is not preserved, and the prejudice to the respondent if the injunction is granted.'

These are the ordinary principles to be applied in determining an application for injunctive relief to restrain a principal from having recourse to a bank guarantee in breach of an implied or express negative undertaking not to have recourse¹⁹.

Third, as to the application of these ordinary principles to a contract that is characterised as a risk allocation device, the Court firmly stated there are not separate or special rules that apply²⁰:

Many of the authorities refer to the importance of the circumstance that a bank guarantee may be intended to operate as a risk allocation device. However, that is not to say that applications for injunctive relief in this context are determined by posing the question, at a level of abstraction, whether the bank guarantees were 'risk allocation devices'. The fact that an injunction is sought in respect of recourse to a bank guarantee does not mean that the injunction is to be determined according to some different body of principles...

Fourth, the Court noted that the trial judge had principally relied on²¹ the cases of Sugar Australia and Daewoo Shipbuilding & Marine Engineering Co Ltd v INPEX Operations Australia Pty Ltd; in finding that the characterisation of the security provision of the contract as a risk allocation device was a 'controlling' factor in determining the balance of convenience meaning the injunction should be denied, even though there was a serious question to be tried. As to these authorities:

• The Court of Appeal noted that in Sugar Australia 'there was no question, in that case, about whether the owner had come under some supervening or overriding obligation to return or release the guarantees'. The Court explained further that in the reasons of Osborn and Ferguson JJA, where they noted the 'status quo' should be that the owner can have recourse to the bank guarantees, that should not be read as saying that where a contract is a risk allocation device, the status quo is that the owner can have recourse. What has been misapprehended in relying upon Sugar Australia is the plurality said that the status quo should be that the owner has recourse on the assumption only that the construction proposed by the owner is accepted²²; and
• Sugar Australia does not stand for the proposition that^23:
  where bank guarantees are to operate as risk allocation devices under a construction contract during the period prior to their required release, that characterisation dictates the outcome of the balance of convenience inquiry arising upon demonstration of a serious question to be tried that the guarantees were required to be released prior to the owner's proposed recourse.
• Likewise, to the extent that the decision of Rees J in Daewoo, stands for the proposition that the characterisation of bank guarantees as a risk allocation device means an injunction should be refused even if there is a serious question to be tried as to the owner having to return or release the guarantees – the Court of Appeal disagreed²⁴.

Fifth, even if a construction contract is characterised as a 'risk allocation device', where an injunction is sought to restrain an owner having recourse to a bank guarantee, the Court is still required to 'weigh the competing risks of injustice' ²⁵. The 'character of the bank guarantees as risk allocation devices' is relevant in that if a final hearing determines that GSA was obliged to return the guarantee, it will have been deprived of reliance upon an important commercial feature of the guarantee²⁶. The risk allocation function of the guarantee does not 'control or dictate the outcome of the Court's consideration of the balance of convenience, nor can it conclusively determine the status quo in some limiting way, when the very issue about which a serious question arises is whether that function had come to an end.' ²⁷

Court of Appeal – injunction granted

The Court of Appeal held that the trial judge erred by 'elevating the risk allocation function' of the bank guarantees to a 'decisive or controlling consideration in the weighing of the balance of convenience.'²⁸ The Court of Appeal, in re-exercising the discretion to consider the interlocutory injunction application, granted the interlocutory injunction.

The Court found there were 'two pathways' to a conclusion that there was a serious question to be tried that GSA was obliged to return or release the bank guarantees²⁹. First, as the obligation to return or release the bank guarantees was triggered, GSA was precluded from having recourse to the bank guarantees. Second, although the trial judge did not determine this issue, the Court of Appeal also found there was a serious question to be tried as to whether GSA was required to return the guarantees under the DLP agreement, and was therefore prevented from having recourse to them.

The Court of Appeal also found, for the reasons given in Lucas Stuart, there was a serious question to be tried as to 'availability of permanent injunctive relief on the footing that damages for breach of a negative stipulation are not likely to compensate for the reputational harm that might be caused by recourse to the guarantees'. ³⁰

As to the balance of convenience, the Court of Appeal observed that there is no reason 'not to accept that Synergy is likely to suffer prejudice of the kind described earlier if an injunction is refused.' ³¹

While it is correct to say that while Synergy 'voluntarily assumed' a 'kind' of prejudice if the bank guarantees were called upon, it never 'voluntarily assumed' prejudice that the bank guarantees might be pulled after the final certificate was issued.³² The Court noted that GSA did not identify any specific prejudice of being unable to have recourse to the guarantees. Accordingly, the prejudice that Synergy might suffer, were the bank guarantees pulled, needed to be given 'substantial weight.' The Court of Appeal noted 'that prejudice could not be devalued on the basis that it reflected the risk allocation in the contract'.³³ Although GSA did not adduce any evidence of potential prejudice if the injunction were not granted, the Court noted that it may 'be deprived of a 'pay now, argue later' benefit' in relation to one of its claims for defects until final determination of the claims. But, the Court noted that even if an interlocutory injunction were not granted, as the bank guarantees did not seem to have an expiry date, GSA would not be deprived of the benefit of the bank guarantees³⁴.

The Court of Appeal held that the balance of convenience favoured the grant of an injunction.

The impact of Synergy

The decision of Synergy was applied by Justice Craig in the Cobolt Constructions case in respect of applications for injunctive relief to restrain an owner from having recourse to a bank guarantee in breach of a negative stipulation, express or implied, in a contract not to present the bank guarantee in certain circumstances. Justice Craig's analysis of the approach to assessing the balance of convenience is particularly instructive for practitioners. ³⁵

Cobolt Constructions

In the Cobolt Constructions case, Cobolt and Duke entered into a construction contract for the construction of apartments in Collingwood, Victoria. Following commencement of the works, Duke issued a notice taking the entirety of the works out of Cobolt's hands. Cobolt then sought to terminate the contract, citing numerous breaches and repudiation by Duke. Approximately two years after termination, the replacement Superintendent under the contract issued payment certificate 22 to Cobolt, certifying that Cobolt owed Duke liquidated damages of $877,800 under the contract. On 15 August 2025, Duke notified Cobolt that it intended to have recourse to the security under the contract due to failure to pay the amount certified in payment certificate 22.

Cobolt applied to the Supreme Court of Victoria for an interlocutory injunction seeking to restrain Duke from having recourse to two bank guarantees provided under the Contract. The matter was listed on an urgent basis for oral argument on 16 September 2025, as it was contended that Cobolt may allege that Duke was obliged to return one of the bank guarantees from 22 September 2025.

The key issue was whether the right to make a call on the security under clause 42.11 of the contract had been 'enlivened' or not³⁶.

In support of its application, Cobolt submitted a number of affidavits from Mr Munn setting out the potential prejudice it would suffer if Duke had recourse to the securities, including: the impact on Cobolt's commercial position; its bank may reconsider providing finance on future projects; having a bank guarantee called will impact Cobolt's ability to tender for future projects; and the need to reimburse the bank which will impact Cobolt's financial position.

Decision

Justice Craig made the following observations about the principles to be applied and approach of the Court to the application.

Justice Craig observed that:

• the commercial purpose of the performance guarantee (here, clause 5.5) was to create a 'risk allocation mechanism'; and
• clause 5.5 contained a negative stipulation not to have recourse to the bank guarantee unless, within the time period specified by the Contract, certain conditions had been satisfied³⁷.

Where there is a 'strong claim which easily satisfies the serious question to be tried threshold', an interlocutory injunction may be granted 'if the balance of convenience if fairly even'.

Justice Craig found that an injunction should be granted restraining Duke from having resource to the bank guarantees. In making this ruling, Justice Craig:

• found that, on a proper construction of the contract, 'clause 5.5 is a risk allocation device'. Properly construed, by clause 5.5, Duke 'promised by negative stipulation not to call upon the bank guarantees unless, within the time provided by the Contract, Cobolt had failed to pay an amount due and payable under the Contract.' ³⁹; and
• also determined that there was a serious question to be tried on whether there was any entitlement on the part of Duke to exercise a right under the Contract in respect of the security depending on whether the work had been withdrawn or the contract terminated.

While His Honour was 'initially concerned' that the evidence 'appeared to overstate the risk of reputational damage':

• 'the authorities are firmly in favour of recognising the importance of the reputational damage that might be caused by calling upon the Security', citing the decision of Chesterman J in Austrak Pty Ltd v John Holland Pty Ltd;
• there is '...considerable weight to the proposition that calling upon bank guarantees is very likely to cause reputational damage which is not capable of adequate compensation by an award of damages'⁴¹; and
• the evidence as to the reputational damage of Cobolt 'should be given some weight' and 'similar evidence has been held to be persuasive.'⁴²

In the exercise of the balance of convenience, Justice Craig was conscious that granting an injunction may 'deprive Duke of the risk allocation mechanism that it had contracted for.' However, Justice Craig also noted that Duke failed to submit any other evidence as to the prejudice it might suffer from being restrained from calling the security.⁴⁴

Duke identified a risk that it would be required to return half of the security upon completion. However, Justice Craig observed that that risk appears to be a consequence of Duke's own delay of over two years in seeking certification, which reduced, to some degree, the concern over the effect of this conclusion on Duke.⁴⁵

Justice Craig found that the balance of convenience was 'neutral or marginally in favour of injunctive relief, even when giving maximum weight to the existence of clause 5.5 as a risk allocation device.' ⁴⁶

Discussion

From the decisions of Synergy and Cobolt, it has been made clear that where a contractor brings an application for injunctive relief to restrain a principal from having recourse to a security – the 'ordinary principles' apply. The fact that provision of a bank guarantee pursuant to a security clause in a construction contract is characterised as a 'risk allocation device' is relevant to the exercise of the balance of convenience; but critically, it is not determinative. To the extent that there are judgments by single judges that have held otherwise (such as in Daewoo), caution should be applied in respect of such findings.

In answer to the questions posed at the beginning:

• once an owner is obliged on a proper construction of the contract to return a bank guarantee, the 'risk allocation function has come to an end', and an owner is precluded from accessing it;
• the 'risk allocation' function of the bank guarantees are not determinative of the outcome, for which Justice Craig cited Synergy; and
• weight can be given to financial or reputational prejudice by a contractor (and a contractor did not 'voluntarily assume' any prejudice of the bank guarantee being pulled after it was obliged to be returned).

Takeaways

The Synergy decision should serve as a warning for owners that if there is no valid entitlement to call upon a bank guarantee at the time of seeking recourse, the bank guarantee clause will no longer be seen as being a 'risk allocation device' and an application for injunction may be granted. Owners should therefore ensure that the bank guarantee is not required to be returned upon issue of a final certificate in the event of potential disputes as to the validity of the final certificate. Similarly, there may be merit in having a number of securities that are to be returned at different points under a construction contract, in the event that there are disputes after completion (or as to when completion has been achieved).

If an injunction application is made:

• contractors should ensure evidence is given of potential prejudice, particularly on cash flow, and the ability to tender for future projects;
• owners should ensure that evidence is given of potential prejudice that may be suffered if an owner is disallowed from having recourse to a security. In both the Synergy and Cobolt Constructions decisions, neither owner adduced sufficient evidence of such prejudice.

Footnotes

1. Synergy Construct Australia Pty Ltd v GSA North Terrace Pty Ltd (atf GSA North Terrace Unit Trust) [2025] SASCA 72, applying Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd (2012) 28 BCL 226; [2010] NSWCA 283.

2. Synergy, [56].

3. Synergy, [59].

4. Synergy, [64].

5. Synergy, [65].

6. Synergy, [67].

7. Daewoo Shipbuilding & Marine Engineering Co Ltd v INPEX Operations Australia Pty Ltd [2022] NSWSC 1125, [108] ('Daewoo').

8. Synergy, [75].

9. Synergy, [4].

10. Synergy, [5].

11. (2016) 260 CLR 85 ('Simic').

12. [1998] 3 VR 812.

13. (2008) 249 ALR 458.

14. [2010] NSWCA 283.

15. [2015] VSCA 98 ('Sugar Australia').

16. Synergy, [79] referring to Simic.

17. Synergy, [79].

18. Synergy, [88].

19. Synergy, [87].

20. Synergy, [87].

21. Synergy, [71].

22. Synergy, [97].

23. Synergy, [98].

24. Synergy, [99].

25. Synergy, [100].

26. Synergy, [102].

27. Synergy, [103].

28. Synergy, [104].

29. Synergy, [107].

30. Synergy, [112].

31. Synergy, [113].

32. Synergy, [114].

33. Synergy, [11]

34. Synergy, [101].

35. See also the application of Synergy by Sloss J in L.U. Simon Builders Pty Ltd v Cardingan Commercial Pty Ltd [2025] VSC 655.

36. Cobolt Constructions, [5], [6].

37. Cobolt Constructions, [16].

38. Cobolt Constructions, [15].

39. Cobolt Constructions, [16].

40. [2006] QSC 103.

41. Cobolt Constructions, [47].

42. Cobolt Constructions, [47].

43. Cobolt Constructions, [49].

44. Cobolt Constructions, [50].

45. Cobolt Constructions, [49]

46. Cobolt Constructions, [51].

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.