Saipem Australia Pty Ltd v GLNG Operations Pty Ltd (No 2) [2015] QSC 173: Performance security

KEYWORDS: CALLING ON SECURITY

KEY TAKEAWAY

Section 67J of the Queensland Building and Construction Commission Act qualifies the use of a security provision rather than providing the source of a party's entitlement to security.

Whether a performance guarantee acts to allocate risk has a decisive impact on the balance of convenience when seeking an interlocutory injunction.

Background

In 2011, Operations Pty Ltd (as agent for Santos GLNG Pty Ltd and others) (GLNG) engaged Saipem Australia Pty Ltd (Saipem) to construct a gas pipeline. Saipem was required to provide two bank guarantees (Performance Security).

Under clause 5.5(a), GLNG could call on the Performance Security to recover any loss resulting from Saipem's default under the contract or any debt due.
Under clause 5.5(c), Saipem could not restrain GLNG from calling on the Performance Security (even if GLNG's right to payment was in dispute).

On 18 December 2014, GLNG issued two delay notices in relation to Mechanical Completion and Practical Completion. GLNG claimed liquidated damages and demanded full payment by 9 January 2015. Reserving its right to call on the Performance Security if necessary, GLNG purported to give notice under section 67J of the Queensland Building and Construction Commission Act 1991 (Qld) (Act). That section provides:

"(1) The contracting party for a building contract may use a security or retention amount, in whole or in part, to obtain an amount owed under the contract, only if the contracting party has given notice in writing to the contracted party advising of the proposed use and of the amount owed.

(2) The notice must be given within 28 days after the contracting party becomes aware, or ought reasonably to have become aware, of the contracting party's right to obtain the amount owed.

Saipem claimed an extension of the dates for Mechanical Completion and Practical Completion and referred these claims to dispute resolution. Saipem sought, among other things, a declaration that GLNG was not entitled to call on the Performance Security. By this application, Saipem sought an interlocutory injunction to restrain GLNG from having recourse to the Performance Security until the originating application was determined.

The parties' arguments

Saipem argued that GLNG was not entitled to the Performance Security for three reasons.

GLNG's right to the Performance Security under clause 5.5(a) only arose once a debt was due. Saipem considered the liquidated damages demanded by GLNG were not amounts due but merely amounts claimed, that an arbitrator would disallow.⁹
By virtue of section 67J of the Act, GLNG's recourse to the Performance Security was limited to an "amount owed", which Saipem contended meant a "debt due", which Saipem disputed.¹⁰
GLNG failed to give timely notice as required by section 67J(2) of the Act.¹¹

GLNG argued Saipem was not entitled to an interlocutory injunction because it had no legal or equitable claim that could form the basis of final relief as the disputes regarding extension of time were to be resolved through arbitration, rather than the Court.¹²

GLNG conceded there was a serious case to be tried and that Saipem may suffer reputational damage if GLNG called on the Performance Security. However, GLNG argued the reputational damage could easily be avoided if Saipem paid the sums demanded.

The decision

Philip McMurdo J considered whether clause 5.5(a) or section 67J of the Act required a debt be due.¹³ His Honour reasoned that the source of entitlement to call on the security is the contract itself.14 Once a contractual right to call on security arises, section 67J is engaged to the extent that it qualifies the notice required to exercise that right.¹⁵ As such, section 67J is not the source of the entitlement and may only exclude a claim to the extent it does not comply with the notice requirements.¹⁶

McMurdo J considered that Saipem had a serious case in terms of contractual entitlement under clause 5.5(a) but that the relative strength of its argument could not be determined in the proceedings.¹⁷ His Honour then considered the comparative injury that would arise from granting or withholding the injunction; in particular, the impact of the risk allocation in clause 5.5(c).

Saipem argued that its rights were founded in the Act and any inconsistency between the Act and the contract had to be resolved in favour of the Act.¹⁸ McMurdo J rejected this claim.¹⁹

His Honour considered that clause 5.5(c) allocated the risk of financial detriment to Saipem in the event of a dispute, and that pending determination, GLNG was entitled to the security.²⁰ McMurdo J reasoned that inconsistency only arose on non-compliance with section 67J.²¹

His Honour held that the balance of convenience favoured granting an injunction due to GLNG's failure to comply with notice requirements.²² An injunction was granted until the originating application could be determined. McMurdo J agreed Saipem could avoid the risk of reputational damage by paying the amounts claimed. Accordingly, he granted a 14-day injunction to allow Saipem to make payment.²³

http://www.austlii.edu.au/au/cases/qld/ QSC/2015/173.html

See further the note in this update on the decision of Victorian Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [2015] VSCA 98.

Foonotes

⁹ At [18]
¹⁰ At [20]
¹¹ At [21]
¹² At [25]
¹³ At [31]
¹⁴ At [32]
¹⁵ At [33]
¹⁶ At [33]
¹⁷ At [60]
¹⁸ At [52]
¹⁹ At [56]
²⁰ At [60]
²¹ At [59]
²² At [66]
²³ At [65]

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