26 November 2013 Andrew P. Downie

Facts

The matter of Lucas Drilling Pty Limited v Armour Energy Limited [2013] QCA 111 concerned an oil and gas drilling agreement between a principal and a contractor which provided for the principal to give a performance bond in favour of the contractor.

The circumstance in which the performance bond could be called upon was the failure of the principal to pay an amount the principal was obliged to pay under the agreement, and the contractor providing 7 days prior written notice of an intention to make a demand under the performance bond.

The contractor was required to return the bond within 3 days after the termination of the agreement ‘subject to any rights the Contractor may have in relation to the Performance Bond’. The agreement also allowed for the principal to terminate the agreement on account of incompetence or unreasonably slow performance by the contractor after the principal gave notice of the principal’s dissatisfaction. The contractor issued three invoices in July and August 2012 (two of which were for duplicate amounts) and the principal subsequently issued a notice of dissatisfaction. On 29 August 2012 the principal issued a notice terminating the agreement for the contractor failing to remedy the complaints of the principal to its satisfaction, and shortly after this the contractor issued a notice of intention to call on the performance bond for the outstanding amounts owing under the invoices.

First instance decision

The principal applied to the Queensland Supreme Court to restrain the call on the performance bond, and the contractor was restrained as the primary judge held that the contractor was not permitted to call on the bond because its ability to call on the bond resulted from its failure to return the bond in accordance with its obligations under the agreement.

Appeal decision

The principal argued that the contractor ought to be restrained from calling on the performance bond because the failure to return the performance bond was a breach of contract that could be enjoined on normal principles. However, the Queensland Court of Appeal found that the requirement to return the bond was subject to any accrued rights in relation to the performance bond.

The Court considered the principles in Southern Cross Constructions v Bucasia[1] to be applicable (although Bucasiaconcerned reverse situation where the contractor was required to provide security to the principal). In Bucasia, the principal was contractually entitled to call on the security in certain circumstances, and a call was made after termination of the contract. Stevenson J noted that where a contract is terminated, the parties are not divested of such rights that they had already unconditionally acquired, being ‘accrued rights’. When termination occurs, both parties are discharged from further performance of their obligations but the contract is not rescinded from the beginning, and accrued rights are preserved.

Applying the reasoning in Bucasia, the Queensland Court of Appeal held that when the principal terminated the agreement the contractor was possessed of accrued rights in relation to the performance bond, and the contractor was therefore exempted from the obligation to return the bond. For that reason, the Queensland Court of Appeal held that the primary judge erred in finding that there was a prima facie case made out for the grant of the injunction.[2]

Discussion

When parties have an agreement with a performance security, it is important to construe the terms for the return of the security, to ascertain if there is any allowance for accrued rights. For instance, in Lucas Drilling, the agreement required the return of the performance bond ‘subject to any rights the Contractor may have in relation to the Performance Bond’. These words were considered sufficient to make the return of the bond subject to accrued rights in respect of any money that the bond was required to secure. [1] [2012] NSWSC 1419. [2] Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57 at [19].