Bank Guarantees As Security: Part 3 – When Will Courts Step In?

May 29, 2023

When a principal intends on calling on a bank guarantee the contractor is often left seeking injunctive relief as the only remedy to prevent the principal from doing so.

An application for an injunction is an important step for a contractor to consider, especially when the contractor’s reputation and cash flow is on the line.

What is an interlocutory injunction?

An interlocutory injunction is an equitable remedy granted by the Court preventing the principal from calling on a bank guarantee. If the principal has already called upon and received payment of the bank guarantee it is possible (but more difficult) to seek a ‘mandatory injunction’ which requires the principal to perform a specific act (i.e., place the money into a separate bank account and not use).

An injunction application can sometimes be costly (e.g., the costs to run and defend it could exceed the value of the bank guarantee altogether) and despite numerous attempts have been repeatedly refused by the Courts where the bank guarantee is unconditional. However, if there is a serious question to be tried as to whether the principal is entitled to call on the bank guarantee then it is a worthy step for the contractor to consider.

How to get an interlocutory injunction?

For an interlocutory injunction to be granted the contractor must:

1.    demonstrate that there is a ‘serious question to be tried’ (i.e., that there is sufficient reason to think that the contractor would be successful if the matter were to progress);

2.    give an undertaking as to damages (that the contractor will pay an amount of compensation assessed by the court to any person affected by the interlocutory injunction);

3.    demonstrate that damages would be an adequate remedy if the bank guarantee is called upon (irreparable damage); and

4.    satisfy that the balance of convenience favours the granting of an injunction (i.e., whether the injury the contractor would suffer if an injunction were refused outweighs the injury which the defendant would suffer if an injunction were granted).

This would appear easy, particularly if there is an ongoing dispute between the parties and if the contractor is set to suffer significant reputational damage. However, the Court is typically reluctant to interfere with a principal calling on a bank guarantee unless the principal:

(a)  is restrained by the terms of a contract;

(b)  has acted fraudulently; or

(c)   has acted unconscionably in contravention of the Competition and Consumer Act 2010 (Cth).

For example, Courts will not prevent calling on a bank guarantee if the contractual interpretation indicates that the bank guarantee was provided for both security and risk allocation (i.e., the commercial purpose of the clause was that the contractor bears the financial risk of any dispute until it is finally resolved) or a contract includes a provision expressly prohibiting the contractor from taking steps to injunct a principal from having recourse to security.

This position is supported in numerous Australian cases including CPB Contractor’s Pty Ltd v JKC Australia LNG Pty Ltd [2017] WASC 112 and more recently Lanksey Constructions Pty Ltd v Westrac Pty Ltd [2022] WASC 90.

What about a failure to adhere to legislative requirements?

Saipem Australia Pty Ltd v GLNG Operations Pty Ltd (No 2) [2015] QSC 173 explored the interaction between the recourse provision under the contract and the notice requirement under s67J of the QBCC Act (as discussed last week).

Saipem Australia Pty Ltd (‘Saipem’) was required to complete certain stages (Mechanical Completion and Practical Completion), however, GLNG Operations Pty Ltd (‘GLNG’) claimed liquidated damages for delay in achieving both and sought to call on Saipem’s security.

Saipem had sought an injunction to prevent GLNG from having recourse to the security with one of the issues determining the balance of convenience being GLNG’s failure to provide notice in accordance with s67J of the QBCC Act.

It was held that Saipem had established a serious case to be tried but the balance of convenience did not favour the grant of an injunction as the risk of damage (namely, adverse effect on credit rating, increased costs of obtaining future finance and decreased competitiveness in bidding for future contracts) was to be borne by Saipem based on the drafting of the recourse provision under the contract.

However, GLNG’s non-compliance with s67J shifted the balance of convenience in favour of granting the injunction restraining GLNG from having recourse to the bank guarantee to recover any sum claimed in relation to the Mechanical Completion, however, the Saipem’s case for Practical Completion was weak, therefore, only a short injunction was granted.

The cases emphasise the need for both parties to be mindful of the language used when drafting security clauses in construction contracts. If the contractor wishes to limit the circumstances in which a bank guarantee as security can be accessed and used, it is necessary to include clear and specific language. However, if a contractor finds themselves in a situation where the principal attempts to call on the bank guarantee the Contractor must act fast (within the notice period) to determine the principal’s entitlement to that bank guarantee and seek immediate legal advice (and possible injunctive relief).

Lamont Project & Construction Lawyers

Lamont Project & Construction Lawyers are well versed in issues relative to security and highly competent in contractual processes from contract negotiation support through to project completion, with the ability to provide holistic advice across a project’s lifestyle.

If you have any questions about any matters raised in the above article or, more generally, about security as it relates to your specific circumstances, please contact Lamont Project and Construction Lawyers.

The content of this article is for information purposes only; it does not discuss every important topic or matter of law, and it is not to be relied upon as legal advice. Specialist advice should be sought regarding your specific circumstances.

Contact: Peter Lamont or Stephanie Purser

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