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Recourse to Securities – Reputational Harm

by Michael Whitten

RECOURSE TO SECURITIES: REPUTATIONAL HARM – DOES IT ALWAYS TIP THE SCALES? by  Michael Whitten QC Chancery Chambers April 2016

 

Introduction In June 2014, I presented a paper entitled “Calling on a Performance Security: As Good As Cash?”. That paper examined various facets of performance securities, particularly within a building and construction context. Among them was the topic of interlocutory injunctions to restrain a call on a security (most commonly, bank guarantees), including a review of then recent cases to distil not only the guiding principles governing such applications for interlocutory relief, but also to identify any recent jurisprudential trends in the area.
One of the ‘trends’ identified within the last 10 years or so was the growing number of applications in which contractors seeking injunctions to restrain principals calling on their guarantees have sought to rely on evidence of reputational harm if an injunction was not granted.
This paper serves as a sequel; a closer look at cases involving reputational harm.
What will be seen is a divergence in curial approach, not only in relation to the weight to be given to such pleas, but also how considerations of reputational harm are to be reconciled with long-standing principles permitting very limited circumstances in which a beneficiary will be precluded from having recourse to what has always been regarded as ‘as good as cash’.
Principles governing applications for interlocutory injunctions to prevent recourse – a recap For any interlocutory injunction, a successful applicant must demonstrate: 1
1. that there is a serious question to be tried or that the plaintiff has made out a prima facie case in the sense that if the evidence remains as it is there is a probability at the trial the plaintiff will succeed;
2. that the plaintiff will suffer irreparable injury for which damages will not be an adequate compensation unless an injunction is granted; and
3. the balance of convenience favours the granting of the injunction. 1 Castlemaine Tooheys Ltd v State of South Australia (1986) 161 CLR 148, 153.
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To those, may be added the ‘single test’ reflecting ‘fundamental principle’ authored by the Victorian Court of Appeal in Bradto Pty Ltd v State of Victoria2: that the court should take whichever course appears to carry the lower risk of injustice if it should turn out to have been ‘wrong’.
As a general proposition, injunctions will not be granted to prevent a party from calling upon a bank guarantee, except in cases of:
1. fraud;
2. unconscionability; or
3. breach of a negative stipulation in the underlying contract.
There are, of course, other exceptions (referred to in the last paper), but the above three have, for a long time, constituted the only bases upon which a contractor could have any real hope of success in obtaining an injunction.
In all cases involving recourse to securities, the starting point for any analysis will always be the proper construction of the terms of the relevant contract by which the parties agreed to regulate the circumstances permitting, and requirements for, recourse.
Times have changed Within the balance of convenience considerations, now lies a relatively new species. Contractors have increasingly presented evidence to demonstrate that if an injunction is not granted, their reputation, both financially and competitively, will, or is likely to, be damaged, but that damages will not, or is unlikely to be, an adequate remedy.
Evidence of reputational harm
The cases reveal that evidence of reputational harm will commonly include statements along the lines of3:
1. the Applicant has never had a bank guarantee called or equivalent security call on;
2. the Applicant’s bank is currently in the process of undertaking a review of the Applicant’s facilities as part of the annual facility roll; 2 [2006] VSCA 89 at [35]. 3 Taken as examples from cases such as Austrak Pty Ltd v John Holland Pty Ltd [2006] QSC 103 and Structural Systems (Constructions) v Hansen Yuncken Pty Ltd [2010] FCA 1358.
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3. the Applicant’s bank guarantee facility makes up the largest component in terms of credit of the Applicant’s banking facility;
4. the fees payable in respect of the face value of each bank guarantee and the amount of the facility which the bank is prepared to advance to the Applicant is directly referable to how the bank assesses the contingent risk that the bank guarantees will be called upon;
5. the Applicant had always been able to demonstrate that the risk attached to this contingent liability was low as no guarantees had previously been called on;
6. if the bank were to assess that the contingent liability of the Applicant in relation to bank guarantees was higher than in previous years as a result of the Respondent calling the Securities then those fees may increase and the limit of the facility may decrease for the Applicant specifically;
7. the bank will be likely to assess the Applicant’s contingent liability risk as being higher given the calling of the Securities by the Respondent;
8. the calling of the guarantees came as a complete surprise to the Applicant;
9. the Respondent called upon the Securities without first adopting the disputes resolution process under the Subcontract or providing any express indication that it intended to do so;
10. as a result the Applicant, was unable to give prior notification to the bank of the call and this may affect the perception which the bank has over the controls which the Applicant has over its contingent liability;
11. the pricing of the Applicant’s facility compared to its competitors is very competitive, due to the long standing relationship between the Applicant and the bank based on trust between representatives of the parties and respect for business competence;
12. calling of the Securities will have eroded the confidence the bank has in the Applicant’s systems and project management;
13. if the Applicant obtains a court order compelling the Respondent to return all or part of the proceeds of the Securities, that will have a positive and restorative effect on the confidence the bank has in the Applicant;
14. in the building and construction industry, bank guarantees under a building contract are very rarely called upon, and are generally only utilised as a “last resort” when all other options (including contractually stipulated dispute resolution processes under the relevant building contract) have failed;
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15. in the building and construction industry, a builder’s reputation is paramount;
16. the calling up of a bank guarantee is a serious matter, with the potential to irreparably damage the Applicant’s reputation as a competent builder, which might be taken advantage of in future projects by the Applicant’s competitors;
17. virtually all the construction contracts to which the Applicant is a party require it to lodge security in favour of the other contracting party to secure the Applicant’s performance, which is normally provided in the form of bank guarantees;
18. a contractor’s “security” history (in the sense of whether any of its bank guarantees have ever been cashed) is an important part of that contractor’s reputation, and is taken into account by prospective clients of the contractor when considering “Expressions of Interest” or tenders;
19. the Applicant has built its business on meeting its contractual obligations, meaning completing its obligations without the need for security ever being called upon;
20. if the Applicant’s bank guarantee is called upon (or not promptly restored), irreparable damage will be done to its reputation as:
(a) its clients may question its ability to meet its contractual obligations;
(b) its prospects of future successful tenders will be diminished; and
21. competitors will take advantage to the Applicant’s detriment;
22. where recourse has already been had, an order compelling the return of all or part of the proceeds of the securities, will have a positive and restorative effect on the Applicant’s reputation.
In most cases, that evidence has not been (nor some would say, could it be) challenged to any useful degree, if at all. In many of those, that evidence has seemingly proven of such concern to the court hearing the application, that it has tipped heavily the balance of convenience in favour of the grant. In other cases, courts have placed little, if any, weight, and injunctions have been refused.
Why? What is to be made of differing judicial attitudes on this subject, especially when, as will be seen below, the outcome on this issue can be highly influential, if not determinative.
Before we can hope to understand that, we should first consider the approaches taken by courts on each side of the argument.
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Cases where reputational harm has been considered significant
Austrak Pty Ltd v John Holland Pty Ltd [2006] QSC 103
Chesterman J found a serious question to be tried as to whether the respondent had the right to demand payment. On the balance of convenience, he considered evidence that the applicant’s business reputation would suffer should a call be made on a banker’s undertaking it provided by way of security as being a significant factor in favour of the injunction, in light of the importance of such evidence attached by Hunter J in Abigroup Contractors Pty Ltd v Peninsula Balmain Pty Ltd4, who opined:
“… the question of commercial reputation and the effect of a demand on a large contractor, with a record to date which has been evidenced in that context, should not be underestimated and there is a strong legitimate entitlement on the part of such a contractor to protect that reputation to the hilt.” and Rolfe J in Barclay Mowlem v Simon Engineering (Australia) Pty Ltd5:
“… once the evidence [of damage to reputation] is admitted … it demonstrates how inadequate a remedy in damages would be. The matter, so far as the plaintiff is concerned, which is detrimentally affected upon a performance bond being called up, is the perceived ability of the plaintiff to properly perform its obligations under a contract. If the plaintiff’s ability in this regard is called in question, even improperly, it is not difficult to infer that there will be damage to its reputation in the industry in which it operates. Nor is it difficult to infer that its competitors would be quick to utilise such information in competing with the plaintiff. Finally, particularly as matters presently stand in the commercial world, questions may be raised as to the financial viability of the plaintiff … This would be underlined if … there has not previously been any call upon a performance bond. In other words people may be tempted to ask whether the plaintiff’s business was ‘going downhill’.” However, his Honour continued [34] that but for those expressions of opinion, he “would not have accorded particular significance to the effect on business reputation of a contractor suffering a demand on a bank undertaking”… as “news of the dispute between the parties in this case, and of the respondent’s assertions that the applicant’s performance of its contract has been defective, would be at least as damaging to the applicant’s reputation as knowledge that one of its banker’s undertakings had been called on.” He observed that the dispute had been in existence for about two years and the participants in the applicant’s line of business were few in number and, presumably, well aware of each other’s affairs, to the extent that those things are talked about. It was unlikely that serious businessmen would
4 (unreported, Supreme Court of New South Wales, 2 December 1999, No 55034/99) 5 (1991) 23 NSWLR 451 at 461-2; adopted by Austin J in Reed Construction Services Pty Ltd v Khen Seng (Australia) Pty Ltd (1999) 15 BCL 158 at 167.
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jump to the speculations described by Rolfe J because a bank guarantee, provided to answer for a number of contractual contingencies, had been called on.
Nevertheless, his Honour concluded that he “did not feel free to disregard the strong expressions of opinion from judges experienced in this field.” Accordingly, he accepted that the applicant might suffer damage to its reputation which could not be adequately recompensed by an award of damages should it turn out that the respondent wrongly demanded payment. PRA Electrical Pty Ltd v Perseverance Exploration Pty Ltd & Anor [2007] VSC 74
In finding that there were significant prejudices and risks to which the appellant and related companies would be exposed if the injunctions sought were not granted, Smith J [14] accepted evidence that:
• even though the amount involved did not seem that large, nonetheless the loss of it would create significant financial pressures for the appellant and related companies;
• funds securing the bank guarantees were accessible by the appellant and the other companies and so would affect their capacity to draw on funding available from the ANZ Bank;
• that would adversely affect the capacity to tender for and negotiate for contracts, several of which were in the process of negotiation (two of which involved bank guarantees of over $600,000);
• if loss is suffered, for example, through failure to obtain tenders, the assessment of damages would be a difficult and unsatisfactory process.
Although his Honour also accepted that the risk of damage to the goodwill of the business and the reputation of the appellant and its related companies was speculative, he considered that recourse to the bank guarantees carried with it a real risk of damage to the reputation of the appellant and its related companies.
Kellogg Brown & Root Pty Ltd v Australian Aerospace Ltd [2007] VSC 200
Australian Aerospace submitted that:
• damages was an adequate remedy should KBR succeed in the proceeding;
• apart from costs and expenses incurred and profit lost under the contract, all of which were covered either by cl 12.3 or an award of damages should KBR succeed in the proceeding, the other areas of suggested irreparable harm and prejudice were not matters of substance;
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• as to damage to KBR’s reputation, that apprehension was at odds with bringing litigation in which KBR’s reputation would be put on the line;
• as to KBR’s reputation with the DMO and others, there was no independent evidence of such reputation;
• as to harm to the prospect of KBR obtaining the contract for phases 4 and 6, it was plain on what had passed between the parties that KBR could have no confidence in that regard;
• as to KBR’s reputation with its employees, there were few of them and while some may think less of KBR, they must have known what was happening, so that an injunction would not aid KBR’s reputation;
• as to KBR’s employees losing their employment, that was possible but not a certainty, and given their skills, they may well be employed elsewhere;
• as to damage to KBR’s reputation among its competitors, that would be a usual risk and bringing litigation seemed an unusual way to protect it.
Notwithstanding, after taking all matters into account, including the strength of the case, Hansen J concluded [72-74] that the lower risk of injustice favoured the grant of an injunction pending trial, because:
“Whether or not an award of damages would provide KBR with relief that was adequate was but one consideration. The consequential effects of the termination would be likely to be such that damages would not adequately compensate KBR. The consequences would, for instance, be felt in the loss of employees and the present and future effect on KBR’s ability to gain contracts and attract new employees. It would also impact on its commercial reputation with a similar likely effect in relation to gaining contracts. Particularly is that so where the termination was not for cause, which may be readily identified to and by third parties and dealt with, but for convenience which may carry a tendency to indicate unspecified inability or inappropriateness in the area of a defence procurement contract, a nasty sting.” Ewing International LP v Ausbulk Limited & Anor [2008] SASC 25
Layton J considered [120] it important that the harm or injury must have been a consequence of the granting or failure to grant an injunction, and that it must be distinguished from the harm or injury which had been caused by the termination of the contracts and the disputation between the parties. He accepted that:
• the inability to access security would have an adverse effect on the applicant’s business, particularly in trying to obtain future work and at the same time satisfy its creditors; and
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• the calling in of the Performance Guarantees might adversely affect their goodwill and reputation. …
In relation to the effect on reputation, notwithstanding force in the respondent’s argument that the calling in of a Performance Guarantee was a matter which only directly concerned these parties and the Bank, his Honour considered [122] that those in the industry would also appreciate that large contracts were frequently the subject of guarantees and security which are likely to be the subject of a call when termination of contracts occurred. From that, it was not difficult for his Honour to infer that the applicants may suffer damage to reputation and goodwill not only as a result of the dispute between the parties but also as a result of a calling in of the guarantees.
His Honour cited Barclay Mowlem with approval (see Austrak v John Holland above), and continued Rolfe J’s statement:
“I find it difficult to see how a court could ever assess the damage occasioned to the plaintiff in these circumstances. I am of course not overlooking the fact that the court must do its best to assess damages, but it is only necessary to state the type of problems which may confront the plaintiff to demonstrate the difficulty, if not impossibility, which it would face in proving the quantum thereof.” as well as Smith J’s considerations in PRA Electrical Pty Ltd v Perseverance Exploration Pty Ltd.
Given the background and the evidence before him, His Honour concluded [131] that damages would not be an adequate remedy. Further, there was a risk that if the defendants were to call on the bank guarantees, Ewing may well become insolvent and be unable to continue trading, which strongly suggested that damages were an inadequate remedy. “A company’s inability to continue trading is without a doubt a matter that cannot be remedied by awarding damages.” Thiess Pty Ltd v Pacific National (Victoria) Pty Ltd [2009] VSC 670
In Thiess, the damage to reputation was said to be one that ‘might affect the plaintiff adversely when negotiating contracts for future business, because the events may cast some doubt upon its willingness or ability to perform, and significantly, may give to its competitors an unfair advantage to use the occasion as an opportunity to differentiate themselves from the plaintiff.’
Judd J considered [20] that the basis for the suggested damage, set out in the affidavit material, initially appeared to overstate the risk of reputational damage. However, after being directed to Austrak Pty Ltd v John Holland, his Honour was persuaded, as Chesterman J was in that case, that notwithstanding reservations,
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authority was firmly in favour of recognising the importance of the reputational damage that might be caused by conduct of the kind that occurred in this case.
His Honour referred [21] to the decisions cited by Chesterman J such as that of Hunter J in Abigroup Contractors Pty Ltd v Peninsula Balmain Pty Ltd, Rolfe J in Barclay v Mowlem, Austin J in Reed Constructions, and Byrne J in Walter Construction Group Limited v Secretary Department of Infrastructure6, as giving “considerable weight to the proposition that calling upon guarantees is very likely to cause significant reputational damage which is not capable of adequate compensation by an award of damages.”
He was not persuaded [22] that because the guarantee had been called and the money paid, that ‘the horse had bolted,’ therefore any reputational damage had been done, and that the injunctions sought would not remedy the plaintiff’s loss of reputation. Judd J opined [23]:
“The restoration of the status quo, or a position near enough to the status quo, will restore the plaintiff to a position where a guarantee is reinstated and can be held by the defendant, subject to the supervision of the Court. This will go some way to contain the damage done to its reputation pending trial.”
His Honour concluded [24-25] that this was a case where justice required orders to restore the status quo. The prejudice or harm to the defendant was negligible in the sense that while the defendant was denied what it contended to be a guarantee equivalent to cash, it was not denied access to a guarantee to satisfy its legitimate claim, if it had one. ‘On the other hand, if the injunction was refused, the plaintiff was left in the position where it was exposed to reputational harm which seemed to be accepted by the courts as a by-product of the events that have occurred and which, 6 Unreported, Supreme Court of Victoria, Byrne J, 6 June 2000, No 4637/00; [2000] VSC 232. Author’s note: The extent to which Byrne J placed weight on considerations of reputational harm is unclear from the judgment. His Honour’s only reference to it was at [14]: “The balance of convenience is indisputably in favour of WCG. Its construction manager, Peter Anthony Scanlon, deposed as to the adverse commercial consequences of the calling up of the bank undertakings.” The decision to grant the injunction appears to have been more heavily based on his Honour’s findings at [11] that he was “satisfied that there is a serious issue to be tried as to the terms of the contract under which the work was performed” and that “there is a serious issue as to whether OMP had any entitlement to require the provision by WCG of the bank undertakings”. In apparent amplification of that view, at [13], he held that there was “an issue as to the existence of the contract under which the undertakings were given.”
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as has been recognised by the courts, cannot be adequately compensated by an award of damages.’
Walton Construction (Qld) P/L & Anor v Venture Management Resources International P/L & Anor [2010] QSC 31
Recalling Chesterman J’s scepticism about evidence of asserted reputational harm in Austrak Pty Ltd v John Holland, Douglas J nonetheless followed earlier expressions of views by other judges experienced in the litigation of building contracts that those concerns were real, and felt he ought also take such an approach.
Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd [2010] NSWCA 283
Lucas v Hemmes has become something of a watershed moment for the ‘proreputational harm school’. In what might be described as a conflational curiosity, Campbell JA, considered [9] that the prospect of damage to reputation provided:
“…a sufficient reason why the Applicant has established that there is a serious question to be tried concerning not only the existence of a breach of a negative stipulation requiring the Respondent not to call on the performance bonds in circumstances not justified by clause 16, but also that the only relevant legal remedy, namely damages, will not be an adequate remedy.” MacFarlan JA observed [45] that Courts have recognised on a number of occasions7 that ‘calls upon performance bonds may cause significant damage to a contractor’s reputation and financial standing that is not readily curable by an award of damages.’
There, cross-examination of the applicant’s evidence, which his Honour described as being of a ‘general nature’, demonstrated it was not intended to suggest that if the bonds were called upon, the applicant would be likely to suffer any harm different from that which would ordinarily be suffered if a contractor’s performance bonds were called upon. However, his Honour did not consider that that detracted from the applicant’s position:
“If a performance bond is called upon with contractual justification, the contractor will have to bear, without recourse, whatever loss that follows. However if, as is contended to be the case here, calls made by the respondent in reliance upon non-compliance with its Notice of 19 July 2010 would be without contractual justification, the contractor has a case for restraining the principal from making the calls….”
7 Citing for example Barclay Mowlem Construction Ltd v Simon Engineering (Aust) Pty Ltd ibid at 461 – 462, and Reed Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd ibid at 167.
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As the considerations on the balance of convenience established that there was a serious question to be tried about whether damages would not adequately compensate the applicant for the harm it would suffer if the bonds were called upon, his Honour concluded [48] that there was a serious question to be tried about whether final injunctive relief was available.
Following an earlier unsuccessful application for an interim injunction, part of the applicant’s security was called up. Nonetheless, Macfarlan JA did not consider [50] that that negated the applicant’s evidence that it would suffer a loss of reputation and financial standing if the balance of the bonds were called upon. He saw no reason why, in the absence of evidence indicating otherwise, that the Court should not assume that further calls were likely to increase the damage and that a restraint upon further calls, upon the basis that they (like the earlier calls) were arguably contractually unjustified, would tend to lessen the adverse impact of the earlier calls.
Structural Systems (Constructions) v Hansen Yuncken Pty Ltd [2010] FCA 1358
Citing Thiess Pty Ltd v Pacific National (Victoria) Pty Ltd, Tracey J held [22] that an undertaking given by Hansen Yuncken was to be continued pending the hearing and determination of the proceeding, and that if Hansen Yuncken was not prepared to renew its undertaking, he would be disposed to grant an injunction. He considered that either course would:
“…ensure that Structural Systems’ relationships with its bankers and its reputation in the industry are protected pending the resolution of the underlying disputes and a trial … Neither will cause any significant prejudice to Hansen Yuncken.” Metro Chatswood Pty Ltd v CRI Chatswood Pty Ltd & Ors [2012] NSWCA 49
Despite the evidence relied upon by Metro being described by Meagher JA [17] as in ‘fairly general terms’, his Honour considered that it sufficiently established that there were ‘real risks of financial and, to the lesser extent, reputational detriment, to Metro both directly and indirectly because of its financial dependence on the welfare of the Precision Group.’ Accordingly, he held that in circumstances where Metro was prepared to provide security for interest on the payment delayed, the balance of convenience clearly favoured the grant of an injunction so as to preserve the utility of the appeal in relation to the relief sought for delivery up of the Bank Guarantee. Siemens Limited v Forge Group Power Pty Ltd (in liq) [2014] QSC 184
Forge submitted that the evidence on behalf of Siemens that “the plaintiff has never had a bank guarantee called upon which has not subsequently been returned” meant
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that if other guarantees provided by Siemens had been “called upon”, there could be no damage to Siemens’ reputation.
However, Philip McMurdo J considered the effect of Siemen’s evidence [23] was that ‘there was a substantial prospect of damage to the reputation of Siemens as a reliable contractor from the making of the payment which, absent an injunction, would be demanded from its guarantor.’ He accepted that the evidence had less weight because the representatives of the plaintiff who had provided the information were not sufficiently identified. But, he noted, ultimately an objection to that evidence was not pressed and the deponent was not required for cross-examination. Thus, the evidence was ‘not in any respect inherently unlikely and it cannot be given no weight.’
Therefore his Honour concluded [24], that Siemens had demonstrated the likelihood of losses for which it could not be adequately compensated by an award of damages, and that in relation to its loss of reputation, ‘such a loss would be difficult to quantify fairly and in any case, it is a loss which Siemens would have to recover from an insolvent party.’
[32] Forge also relied upon observations by Callaway JA in Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd, to the effect that guarantees are given “to allocate the risk as to who shall be out of pocket pending resolution of a dispute”, and that, among other things, courts should not enjoin the enforcement of such security whenever there is a dispute between the parties, because that would interfere with the deliberate allocation of the risk which Callaway JA described. However, P McMurdo J considered that Siemens had done more than deny the claims made by Forge. Rather, it had demonstrated a serious case to be tried to the effect that, according to the parties’ agreement, Forge was not entitled to call upon the securities.
Lend Lease Pty Ltd v Sugar Australia Pty Ltd [2014] VSC 476
At first instance, on the balance of convenience issue, Vickery J held [77-79] that if an injunction was not granted, and the claims of Lend Lease were ultimately vindicated, it would, in all likelihood, suffer irreparable harm for which damages would not be an adequate remedy, because:
• Lend Lease would in all likelihood suffer significant reputational damage should Sugar Australia cash the Bank Guarantees;
• there was an appreciable risk that Sugar Australia would not be able to satisfy an award of damages should Lend Lease ultimately succeed in its claims against it; and
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• in comparison, he was not satisfied that there was likely to be more than minimal inconvenience to Sugar Australia should it be restrained from acting on the Recourse Notice pending the trial of the proceeding.
The decision was overturned on appeal (see below).
Monadelphous Engineering Pty Ltd & Anor v Wiggins Island Coal Export Terminal Pty Ltd [2014] QCA 330
In Monadelphous, the primary judge noted that one of the witnesses for WICET deposed to the effect that MMM in truth faced little or no reputational risk, but observed that a contractor’s right to rely upon such a risk as a material factor had been widely recognised in the cases: Abigroup Contractors Pty Ltd v Peninsular Balmain Pty Ltd, Barclay Mowlem Construction Ltd v Simon Engineering (Australia) Pty Ltd, Reed Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd, Austrak Pty Ltd v John Holland Pty Ltd, and Walton Construction (Qld) Pty Ltd & Anor v Venture Management Resources International Pty Ltd & Anor.
The primary judge considered, however, that the evidence did not establish such a serious high level risk that the calling of the bank guarantees would cause irreparable harm, as was found by Douglas J in Walton Construction v Venture Management Resources International. The primary judge also took into account that WICET appeared to have a valid contractual entitlement to have recourse to the security, having established a bona fide claim in circumstances in which MMM had made an express contractual promise that it would not seek to injunct or otherwise restrain WICET from having recourse to the security.
On appeal, Fraser JA (Muir and Morrison JJA agreeing) considered [44] that the evidence concerning reputational damage suffered from the weaknesses identified in the submissions for MMM. Even so:
“… like Chesterman J in Austrak Pty Ltd v John Holland Pty Ltd, I would not have been inclined to attribute great significance to MMM’s evidence about the effect on its business reputation of a demand on a bank guarantee supplied under a contract which allowed WICET to make such a demand merely upon the basis of a bona fide claim; but like Chesterman J, I am also disinclined to disregard the strong expressions of opinion to the contrary by judges of very considerable experience in this field. I conclude that MMM has shown that it may be prejudiced by WICET calling upon the guarantees. I would also accept that this prejudice might prove very difficult to quantify.”
An injunction was nonetheless refused because WICET was permitted recourse to guarantees under another contract with MMM.
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Best Tech & Engineering Ltd v Samsung C&T Corporation [No 2] [2015] WASC 447
In Best Tech (BTE), the parties’ contract provided relevantly that:
• the security was subject to recourse upon at least 10 days notice of intention to have recourse ‘subject to the purchaser showing any losses, damages or substantial breaches of BTE’s scope of works as a result of actions by BTE’;
• recourse would only occur when there were ‘losses and costs due to demonstrated and fully documented defective workmanship by the supplier or money owing due to costs caused by the supplier to the purchaser that fall into the responsibility of the supplier’; and
• prior to any recourse to security in relation to defective workmanship, the Purchaser had to provide the Supplier with documentation which provided for an independent third party assessment of any defect, including detail as to the nature of the defect, the reasons for responsibility being assigned to the Supplier and an estimated cost to rectify the defect.
BTE contended that, if the security was called upon, it would suffer irreparable harm in its standing with its bankers, to its commercial reputation and in relation to a proposal for it to proceed to a public listing. That contention was supported by affidavit evidence that:
• BTE would suffer ‘serious commercial consequences if the security was called upon, based on a previous experience in April 2014 when a bank guarantee provided by BTE was called upon by Forge Group Construction’;
• that event resulted in BTE’s Thailand bank effectively freezing all of BTE’s accounts and thereby affecting Best Tech’s ability to trade;
• that event also caused BTE’s Thailand bank to increase its risk rating, requiring it to provide additional security for a bank guarantee facility provided by its Thailand bank;
• that increased risk rating would affect BTE’s capacity to obtain a bank guarantee for a very substantial contract in respect of which it was then negotiating;
• BTE’s reputation and ability to win future work would be affected in the event that the security was called up; and
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• BTE was in the process of becoming listed on a public stock exchange and that any loss of reputation would have substantial repercussions.
That evidence was the subject of objections by Samsung. Ultimately, Samsung made no application for a ruling on any of its objections.
Chaney J accepted [52] that notwithstanding the evidence of prejudice was expressed in ‘somewhat generalised and conclusionary statements’, exercise of the security would have adverse consequences for BTE of the nature described. However, his Honour added [53] that:
“…Those consequences must, however, be seen in the context that, provided the preconditions to a call on the security are met, they are consequences which Best Tech has accepted by agreeing to the provision of the security in the Contract.”
In granting an interim injunction, his Honour concluded [62] that BTE had raised a prima facie case that Samsung was not entitled to call upon the security on the basis of its failure to meet the notice requirements of the contract, and that the balance of convenience favoured the grant in light of the asserted adverse consequences to BTE resulting from the exercise of the security.
Cases where reputational harm has not been considered significant Clough v Oil & Natural Gas Corporation Ltd [No 3] [2007] FCA 8082
In considering the balance of convenience, Gilmour J determined not to accord any significant weight to Clough’s concerns as to its reputation, because:
• various media reports and public disclosure to the ASX showed that the market knew of Clough’s dispute with ONGC;
• Clough’s Board had told the market that it considered the claims to be “spurious” and used public relations to protect its position;
• any impact had already occurred as the call had been publicised through the judgments of the Court and media reports including as to the disputes between the parties, that Clough has been “sacked” from the Project, and that the Performance Guarantees had been called upon;
• the market generally understood that all that is required for a performance bond to be called on is a claimed breach of contract and not necessarily an established breach;
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• the call and payment of the bonds in the Bass Gas dispute had not prevented Clough from securing high value construction contracts, many of which had involved the provision of performance guarantees;
• there was no solid evidence of any loss of business from the calls;
• while his Honour accepted that there was considerable force in Clough’s submission that greater damage to its reputation with its financiers would flow from its breach of its various facility agreements by enjoining the Banks notwithstanding Clough’s express authorisation to each of them in those agreements to pay without reference to them, and notwithstanding the fact that Clough might dispute entitlement, he concluded that if anything, the maintenance of the injunctions would impair Clough’s position as the Banks would not extend any further facilities to Clough until such time as the injunctions against them were dissolved or otherwise dispensed with.
Instead, and in accordance with decisions such as Olex Focas Pty Ltd v Skodaexport Co Ltd,8 his Honour gave significant weight [127] to ‘the importance in international commerce of giving effect to instruments such as these performance guarantees.’ Clough Engineering Limited v Oil and Natural Gas Corporation Limited [2008] FCAFC 136
The Full Court dismissed Clough’s appeal, principally on the basis that upon the proper construction of clause 3.3.3 of the Contract, when read together with clause 2 of the performance guarantee, ONGC was entitled to invoke the guarantee notwithstanding the existence of a dispute between Clough and ONGC as to whether Clough had failed to honour any of its commitments under the Contract. Those provisions showed that the commercial purpose of the Contract was to allocate the risk of who should be out of pocket notwithstanding that there may be a genuine dispute as to whether Clough had failed to honour commitments under the Contract. The risk was allocated to Clough, there being no clear words to inhibit ONGC as the beneficiary of the guarantee from invoking it.9 Accordingly, the findings below on the balance of convenience did not call for any in-depth analysis on the appeal. Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd [2010] NSWCA 283
Although he agreed with the view of Macfarlan JA on the construction of the contract, Young JA, in his dissenting (and, it is submitted, insightful) judgment, disagreed that
8 [1998] 3 VR 380 at 403 9 Citing with approval Fletcher Construction [1998] 3 VR at 821, 827, and Brooking JA in Bachmann [1999] 1 VR 420,
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an injunction should be ordered. On the question of whether damages were an adequate remedy and the balance of convenience, his Honour observed [63]:
“The damages in the instant case should be able to be calculated with one problem. Normally in cases of breach of contract, damages for loss of reputation are not awarded … Prima facie then, the parties should be left to their rights in damages.”
He continued [65]:
“There is a distinction between upholding the commercial sanctity of contracts made between two commercial persons of no disability setting up a system whereby in lieu of providing cash as a security, a bond which can be instantly accessed by the proprietor is substituted and the question as to whether the time has arrived and conditions have been fulfilled entitling the proprietor to call up that security. However, when considering the injunctive remedy in the latter case, one does not leave out of consideration the former matter. It would completely destroy the purpose of the contractual provision for the Court to be too ready to grant injunctions, particularly just to grant injunctions on the basis that the builder’s reputation would be tarnished if the security were called up.”
Young JA traced [67] the ‘practice of paying particular attention’ to pleas of reputational harm from the decisions of Rolfe J in Barclay Mowlem and Austin J in Reed Construction Services. He observed [69] that although those decisions had been cited in other States, interstate judges had not seemed to have picked up at all on this particular point, though, he posited, perhaps it was never argued.10
It seemed to his Honour that [71]:
“… one must take into consideration when working out questions of balance of convenience that even though there may be some commercial opprobrium to a person who has its performance bond called up, there is also commercial opprobrium to a company against which this Court makes an injunction. Indeed, when sitting in Equity one always takes into account the fact that the application for injunction may be brought for just that purpose. Furthermore, it is a little difficult to pay much credence to a statement by a person against whom it is alleged that the building which it and its subcontractors constructed has over a thousand defects and is not watertight would suffer in its reputation any more if in addition to those facts being known by the general community, it was known that its performance guarantee had been called up in a manner which it disputed.”
Finally, his Honour considered [75] that the case for an injunction had been made weaker by the fact that the builder had not sought an injunction to hold the status quo pending the appeal and the proprietor had in fact called up one and a half of the
10 Referring to examples in Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812 (CA) and Bateman Project Engineering Pty Ltd v Resolute Ltd [2000] WASC 284; (2000) 23 WAR 493.
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securities. Therefore, as “the horse had bolted”, there had already been damage to the commercial reputation of the builder.
Central Petroleum Ltd v Century Energy Services Pty Ltd [2011] WASC 211
On his (interlocutory) construction of the relevant contractual provisions, Kenneth Martin J found no serious question raised by the Applicant. Therefore, [74] issues over damages as a potentially adequate alternate remedy and the balance of convenience did not arise.
Nonetheless, his Honour proceeded with what he would have found on the balance of convenience, and the Applicant’s ‘steadfast submission’ as to an ‘asserted degree of prejudice to its business reputation to necessarily follow on from a calling of the Banker’s Undertaking by Century,’ which relied on the line of New South Wales authority identified by the majority in Lucas Stuart.11
His Honour accepted [79] that:
“… there may well be instances where the cold calling of a performance guarantee may deliver reputational damage to the exposed party (who has caused the guarantee to be provided by the financial institution). Nevertheless, the present case seems to me to be not at all of that ilk, in terms of potential prejudice to the Applicant’s business reputation. Here, it sits readily within the capacity and financial wherewithal of this Applicant to quickly and completely extricate itself from all potential threat of this Banker’s Undertaking being called. It could in swift time (effectively on a without prejudice basis) render a payment of the relatively modest sum (assessed in a commercial context) to Century…”
However, he found unacceptable that:
“…The Applicant’s damaged business reputation argument is a paradigm case of a party ‘bootstrapping’ towards its own asserted prejudice to achieve its end game of injunctive relief….”
He concluded [80] that he would have been ‘deeply troubled that a court of equity was asked to assist a party who could easily, but had deliberately chosen not to, assist itself.’
11 See MacFarlane JA at [45] and [46]. But see contra, Young JA at [66] [70].
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Redline Contracting Pty Ltd v MCC Mining (Western Australia) Pty Ltd (No 2) [2012] FCA 1
As a counter balance to the decision in Lucas Stuart v Hemmes, Redline may be seen as the modern watershed moment for the ‘anti-reputational harm school’.
Siopsis J recited [66] the statements of the Full Court in Clough to the effect that parties to a commercial contract are taken to have contracted against a background which included earlier authorities on the construction of similar contracts.
His Honour opined:
“… If, as Redline contends, a contractor’s reputation is inevitably harmed in the industry when a performance bond or like instrument is called upon, it was open to Redline to protect itself by concluding a contract which provided for, expressly and unequivocally, the more limited range of circumstances in which the unconditional undertakings could be called upon, for which it now contends. In my view, it is unlikely that a trial court will find that in those circumstances, MCC Mining is acting unconscionably, in resorting to the security, by reason of any potential harm to Redline’s reputation.” However, in light of its findings that Redline had failed to demonstrate a prima facie case that it was entitled to restrain MCC from resorting to security, either on the grounds of an implied negative stipulation in the contract, or on unconscionability grounds, the Court considered it is unnecessary to have regard to the question of balance of convenience, and Redline’s application was dismissed. Otter Group Pty Ltd v Wylaars & Anor [2013] VSC 98
In Otter, Hollingworth J was unimpressed with the applicant’s failure to make proper disclosure to the court of its financial position, which not only caused her Honour to doubt Otter’s complaints that it was unable to fund two new products because of the draw down, but it also caused serious concern as to the worth of its undertaking as to damages.
Her Honour accepted [50] that ‘whilst damage to reputation can certainly be a relevant matter in assessing where the balance of convenience lies’, ‘the flimsy state of the evidence’ resulted in her giving little weight to the bald assertion that Otter would suffer reputational damage were it unable to launch the two new products.
She also accepted [51] that, in principle, ‘reputational damage may also be caused by a call on a performance bond or guarantee, as that may call into question a person’s ability to perform their obligations under a contract, as well as their financial
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viability’12. However, she found that apart from the ANZ bank (which presumably was already aware of Otter’s financial position), the Wylaars, and the parties’ lawyers, there was no suggestion that anybody else was aware of the fact that the guarantee has been called upon. Accordingly, her Honour afforded that factor little weight, given the state of the evidence about Otter’s financial viability.
Patterson Building Group Pty Ltd v Holroyd City Council [2013] NSWSC 1484
For White J, the relevance of the balance of convenience to the issue before him was ‘problematic’. However, in applying the principles expressed in Wood Hall Limited v The Pipeline Authority (at 451, 457 and 461), Clough (at [109] and [135]), and Redline (at 66), his Honour held [77] that:
“The plaintiff agreed to supply the bank guarantees on conditions that they could be called on, not only where the defendant had established that the plaintiff owed it moneys, but where it claimed to be owed money. It would substantially weaken the purpose for which such instruments are provided if a principal were to be restrained from calling on the guarantee or performance bond on the ground that to do so would cause hardship to the contractor or damage its reputation. The risk of hardship and the risk of damage to reputation were risks assumed by the plaintiff when it agreed to provide security on terms that recourse could be had to it merely on the defendant’s claiming to be owed money.” Saipem Australia Pty Ltd v GLNG Operations Pty Ltd [2014] QSC 310
Saipem relied on three grounds:
• its prima facie right to shelter behind s 67J of the Queensland Building and Construction Commission Act 1991 (which arguably precluded GLNG from calling on the guarantees because, on Saipem’s submission, there was no debt due because there was a dispute about the payment of money) would be destroyed if the Milestone Payment Security was called upon;
• GLNG would not suffer any prejudice because it would still retain the security in respect of Milestone Advance Payments if it was found that any amount was owing to it; and
• Saipem called evidence that if the security was called upon it would suffer loss to its reputation, have an adverse effect on Saipem’s credit rating and its ability to deal effectively with banks, and it would be subjected to an increase in costs in obtaining future financial security. This was met by evidence from GLNG that 12 Citing Barclay Mowlem and Lucas Stuart.
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it was not aware of Saipem tendering for any new work and that Saipem was expected not to be operating in Queensland following completion of the project. Martin J described that evidence as hearsay and ‘weak hearsay at that’.
GLNG placed considerable weight on the Full Court decision in Clough and the many authorities considered which relate to the proper construction to be applied to performance bank guarantees. The distilled principles included:
• the commercial purpose of guarantees, namely that they be regarded as equivalent to cash;
• the three principal exceptions to the rule that a court will not enjoin the issuer of a performance guarantee, or bond, from performing its unconditional obligation to make a payment;
• the importance, on the balance of convenience, to bear in mind why a beneficiary of a performance guarantee may have stipulated for such an entitlement. As discussed by Callaway JA in Fletcher Construction Australia Ltd v Varnsdorf: to provide security for a valid claim against the contractor; and to allocate the risk between the parties as to who shall be out of pocket pending the resolution of a dispute between them.
Martin J recorded [66] that after examining further authorities, the Full Court in Clough said:
“[82] Notwithstanding the importance of commercial practice, the statements in these authorities do not suggest that the Court should depart from the task of construing the terms of the contract in each case. What the authorities emphasise is that the commercial background informs the construction of the contract. In particular, as Callaway JA said …, the Court ought not too readily favour a construction which is inconsistent with an agreed allocation of risk as to who is to be out of pocket pending resolution of the dispute about breach.
In an effort to answer the decision in Clough, Saipem referred to Bateman Project Engineering Pty Ltd v Resolute Ltd. Bateman was referred to in Clough as an instance of the over-riding rule that the “primary focus” will always be the proper construction of the contract. In Bateman, Owen J was concerned with a clause which provided that “…the [defendants] shall be entitled to proceed with the conversion of the security for the amount claimed and the [plaintiffs] shall not hinder, obstruct, restrain or injunct the Principal from so doing and the [plaintiffs] will not exercise [their] rights under clause 32 prior to the [defendants] drawing down the securities.” That clause was held to be void as being against public policy as an ouster of the jurisdiction of the court.
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His Honour observed [68] an important difference, so far as the balance of convenience was concerned, between the clause in Bateman and the clause in Clough. As was identified in Lucas Stuart:
“[37] … In [Clough] the Full Federal Court placed considerable weight upon the fact that the clause there under consideration required provision of a performance guarantee in the form of that set out in an appendix and that the form referred to the payment by the guarantor “notwithstanding any dispute(s) pending”, without reference to the contractor and “without any demur, reservation, contest or protest” (249 ALR 458 at [30] and [88]–[112]). Whilst the Clause pursuant to which the bonds were provided in the present case (cl 6.1) refers to “unconditional undertakings” the Contract does not contain any wording such as was contained in the pro forma performance bond regarded in Clough as effectively qualifying the terms of the condition precedent stated in the relevant clause.”
His Honour held [69] that the words in clause 5.5(c) of the contract were clear. They are similar to those used in Clough. GLNG did not advance an argument that the clause prevented the court from exercising jurisdiction. It contended that the assessment of the balance of convenience should give considerable weight to the agreement of the parties. The parties, he held, intended that GLNG would have the unfettered right to call upon a performance security even where Saipem disputed GLNG’s right to payment (including where dispute resolution proceedings have been commenced). Relevantly, he concluded:
“The risk has been allocated by the contract to Saipem. There are no clear words which would inhibit GLNG as the beneficiary of the guarantee from invoking it. The parties determined, through the provisions of the contract, that any risk would be borne by Saipem in these circumstances. Where a party has accepted the risk, then it has a substantial hurdle to overcome when dealing with the balance of convenience. In this case, the various matters set out above lead to the balance tipping in favour of GLNG.” Heyday5 Pty Ltd v Cockram Constructions NSW Pty Ltd [2015] NSWSC 884
In Heyday, Stevenson J was satisfied that there was a serious question to be tried as to whether there had been Practical Completion and whether the plaintiff was entitled to return of the Bond. In his Honour’s view, the plaintiff had a strong prima face case for relief.
However, as to the Plaintiff’s submission that it was likely it would suffer “reputational and financial harm” if the Bond was called on “without justification”, his Honour found no evidence to justify that submission. Seemingly undaunted, counsel for the Plaintiff drew the Court’s attention to the observations of Macfarlan JA in Lucas Stuart at [44] and [45]:
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“There is no evidence that inability of the respondent to call upon the performance bonds now would cause any particular financial prejudice to the respondent. Nor is there any evidence that, apart from any impact they may have on the applicant’s reputation, calls by the respondent upon the performance bonds would cause the applicant particular financial prejudice. Courts have recognised on a number of occasions that calls upon performance bonds may cause significant damage to a contractor’s reputation and financial standing that is not readily curable by an award of damages (see for example Barclay Mowlem Construction Ltd v Simon Engineering (Aust) Pty Ltd (1991) 23 NSWLR 451 at 461 – 462 and Reed Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd (1999) 15 BCL 158 at 167).” However, Martin J noted the remarks of Young JA at [70] of Lucas (recited above) as to the impost of mutual ‘commercial opprobrium’, whether an injunction was granted or not.
His Honour found that he had no basis upon which to draw any conclusion as to what reputational damage the plaintiff might suffer if the Bond were to be called on by the defendants, and that ‘to express any view or draw any conclusion would be to engage in speculation.’
Similarly, he found there that it was peculiarly within the plaintiff’s power to adduce evidence of any “financial harm” the plaintiff might suffer were the Bond to be called on and its absence counted against the grant of interlocutory relief. Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [2015] VSCA 98
The successful appeal of the decision of Vickery J (referred to above) primarily turned on his Honour’s failure to resolve construction issues surrounding the relevant contractual provisions, settling instead for a finding that there were serious questions to be tried. Osborne and Ferguson JJA considered [67] that GC 5.2 was intended to allocate risk pending the resolution of a dispute, and that constituted ‘a consideration of fundamental importance in assessing whether the grant of an injunction carried with it the lower risk of injustice.’ They continued [68]:
“… This evident commercial purpose of GC 5.2, when viewed in the context of the accepted principles governing the grant of interlocutory injunctions and the ordinary practice adopted in performance bond cases, required the primary judge to resolve the construction issues raised in order to properly determine whether an injunction should be granted. If this were not done, in effect, the parties would be deprived of the commercial bargain that they made.” On the balance of convenience, Lend Lease relied on affidavits in support of its contention that it would suffer damage to its reputation if Sugar Australia had recourse to the undertakings given by it, in particular:
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• that a call would affect its reputation in the market place for work in the Australian construction industry;
• it was very rare for any company in the Lend Lease group to have its security cashed on a project; and
• it could impact adversely on the cost and availability of bank guarantees and performance bond facilities.
Kaye JA considered that those matters were not of sufficient weight on the balance of convenience to favour the grant of an injunction for three reasons:
• the matters stated in the affidavits were substantially assertions;
• Lend Lease had failed to sustain the injunction granted to it for a sum of at least $1,999,951, and therefore it would sustain any such reputational damage in any event; and
• by agreeing to the recourse clause (clause 5.2), Lend Lease assumed the risk that a call may be made upon the security.
His Honour added:
“I should add that it is notorious that disputes are commonly part and parcel of building contracts. I have some reservations as to the assertions made in the affidavits of Mr Connor that the existence of the dispute in this case would have any substantial adverse impact on the reputation of the respondent in the market place.” Saipem Australia Pty Ltd v GLNG Operations Pty Ltd (No 2) [2015] QSC 173
Back for a second shot, Saipem adduced evidence before Philip McMurdo J that it would suffer damage to its reputation if GLNG made demands upon its guarantees, to wit:
• a demand would have a likely adverse effect on the company’s credit rating, increase its costs of obtaining future finance and decrease its competitiveness in bidding for future contracts;
• for those reasons, Saipem “went to considerable lengths” to pay more than $28 million to avoid GLNG calling up the securities which were the subject of the previous proceedings between the parties in which Saipem was refused interlocutory relief; and
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• credit reporting agencies maintained records of instances where bank guarantees are called upon and reports of those agencies are used by suppliers of materials used in the type of projects undertaken by Saipem.
His Honour observed [45] that while that evidence was criticised in the submissions for GLNG, it was not tested by cross-examination or contradicted by other evidence. Nor, he said, was it inherently implausible. The evidence therefore was to be given some weight. He noted that there were many judgments in which similar evidence had been persuasive.
GLNG submitted that Saipem could do what it did when last refused an interlocutory injunction, namely it could pay the sums demanded. In support, it cited the judgment of Kenneth Martin J in Central Petroleum Ltd v Century Energy Services Pty Ltd at [79ff].
In Central Petroleum, the amount under the guarantee was approximately $312,000. In Saipem, more than $12 million would be demanded. On the last occasion, Saipem found about $28 million to avoid a demand on guarantees. His Honour considered that it did not follow that because the present amount or amounts were smaller, that Saipem could do so again, although there was no evidence that it could not do so.
Of cl 5.5(c) of the contract, upon which GLNG relied, his Honour observed:
“… Saipem there agreed that it would not take any steps to restrain GLNG from making a demand under a Performance Security even when it disputed GLNG’s right to payment and where dispute resolution proceedings had been commenced. By this clause in particular, it can be said that the bank guarantees are a “risk allocation device”, in the sense that they are given “to allocate the risk as to who should be out of pocket pending resolution of a dispute”, as Callaway JA said in Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd. Callaway JA explained that there can be two reasons why the contract may have provided for a performance guarantee, as follows: ‘One is to provide security. If it has a valid claim and there are difficulties about recovering from the party in default, it has recourse against the bank. The second reason, which is additional to the first, is to allocate the risk as to who shall be out of pocket pending resolution of a dispute. The beneficiary is then able to call upon the guarantee even if it turns out, in the end, that the other party was not in default. … It is a question of construction of the underlying contract whether the guarantee is provided solely by way of security or also as a risk allocation device.’” He considered [49] that where, upon the proper construction of the contract, the second purpose of a performance guarantee was risk allocation, that had an impact, often a decisive impact, upon the balance of convenience. He referred to the remarks of Osborn and Ferguson JJA in Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd:
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“[21] If a provision in a building contract requiring a performance bond is intended to operate as a risk allocation device pending the final determination of the dispute between the parties then that intention must be fundamental to a consideration of the justice of an application made to restrain recourse to such a bond pending final determination of the dispute. …. [25] The fact that a performance bond is intended to operate as a risk allocation device is not, of course, necessarily determinative of the right of a party to have recourse to it. It may be subject to a contractual qualification or limitation upon the circumstances in which recourse may be had. Nevertheless, the fundamental characteristic of a risk allocation device informs the task which the Court must undertake in resolving whether or not to grant an injunction. …. [34] If the commercial purpose of a contractual provision is defeated that must bear squarely on the ultimate risk of injustice inherent in the grant of an injunction.” After construing cl 5.5(c) as clearly demonstrating that ‘the Performance Securities were provided also as a means of risk allocation’, and considering any inconsistency with s.67J of the Queensland Building and Construction Commission Act 1991,13 his Honour held [60] that Saipem had established a serious case both as to the contractual entitlement to use the guarantees and the compliance or otherwise with s.67J. But the balance of convenience, he held, did not favour the grant of an interlocutory injunction upon that case, having regard to the parties’ agreement and cl 5.5(c). He opined:
“The risk of damage of the kind described in Mr Palmitessa was one which the parties agreed in the contract, should be borne in this circumstance. Therefore, at least if the case was limited to a claim that there was no contractual entitlement to use the guarantees, an injunction should be refused.” His Honour accepted [64] that there was a prospect of loss to Saipem if GLNG was permitted to make a demand under the guarantees. However, he inferred [65] that it was at least probable that Saipem could pay the amounts claimed, if it had to do so to avoid a demand upon the guarantees. In that way, the prospect of substantial damage to Saipem would be avoided.
Ultimately, having regard to the relative strengths of the two claims under consideration, and influenced by the case of non-compliance with the notice requirements of s 67J, his Honour ordered an interlocutory injunction in relation to the Mechanical Completion claim pending final determination, and in respect of the Practical Completion claim, an injunction for only 14 days.
13 Which his Honour found [59] only occurred in so far as Saipem’s case was that notices had not been given according to s 67J, but that there was no such inconsistency in the agreed allocation of risk by cl 5.5(c) to a dispute about whether, according to the contract, GLNG was entitled to use the security.
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Discussion: rationale for preferred approach
It is superficially attractive to attempt to explain, understand or reconcile the evident schism in approaches and results demonstrated by the above decisions, merely by an assessment of the strengths of the evidence of potential reputational harm adduced in each instance. Not only would that be a somewhat subjective approach, it is unlikely to produce any satisfactory guiding principles, or enhanced certainty for future cases.
What may be observed is that the evidence, generally speaking, has covered the same array of concerns and complaints as to perceived adverse impacts on reputation both in the market place and with financiers, albeit in more recent decisions, with some greater innovation, refinement and detail.
The obvious difficulty, however, is that such evidence is rarely, if ever, based on actual historical events and experiences, but rather perceptions and forebodings about possible future cataclysms. It follows that for a respondent, the ability to test or contradict such evidence is minimal to non-existent. One is then left to the impressionistic fates of how a particular judge might assess the evidence and the weight to be attached to it.
A more useful endeavour may be to explore and try to understand the philosophical differences between the Courts in each of the ‘pro’ and ‘anti’ reputational harm schools of thought. At some point in the exercise of discretion for equitable relief, the Courts in each of the two groups above have departed on the place and importance of claims for reputational harm.
The philosophy that seems to underpin the pro-reputational harm decisions appears at the stage of considering whether damages will be an adequate remedy in the event an injunction is not granted. In what has been fairly arid ground for many years (reflected in the early majority of applications refused) has, relatively recently, sprung claims for reputational harm. This budding new paradigm has, by definition and by the often amorphous nature of the evidence presented in support, driven some judges to the conclusion that any loss or damage suffered by an applicant where an injunction is not granted will likely be extremely difficult to prove, let alone quantify. Notwithstanding the necessary lack of conclusivity surrounding such claims (particularly on interlocutory applications), some courts have been compelled to the view that in the face of what is often depicted as a very dire possibility, the risk of least injustice lies in granting the injunction.
The philosophy of the anti-reputational harm school is based, primarily, upon a more black letter approach to the risk allocation evinced upon a proper construction of the relevant terms of the contract. That school cautions that to do otherwise would result in effectively robbing the agreed security arrangements between the parties of their
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commercial value. Hence, in the absence of the three recognised disentitling grounds – fraud, unconscionability or breach of an negative stipulation in the underlying contract – those Courts adhere to the age old precept that a beneficiary of such security ought not be precluded from recourse.
In light of the apparent differences in focus at different points in the decision making process, a more ‘root cause analysis’ is required.
Thankfully, both schools almost always start with the construction of the relevant terms of the contract. In the absence of ambiguity, etc., that exercise is to be undertaken as at the date of the concluded contract, by reference to the objective language employed by the parties in their bargain, and with commercial common sense. One imagines that if any of we lawyers or judges who, well after the event, are called upon to argue and determine these disputes were actually in the negotiating room when the parties formed their contract, the builder would be heard to say that he is satisfied with terms which allowed the principal to have recourse to the builder’s security in the event that the principal became entitled to damages for the builder’s default or breach. He would also probably not be heard to complain about any potential for reputational harm which might follow, because, being able to control his own performance (he thinks), he is prepared to assume that risk. But often, of course, that is not precisely what many of the standard or even bespoke terms provide. Were the same builder told that the principal could in fact call up the bank guarantees merely on a claimed entitlement to money, and even where the builder disputes any breach, the same builder would likely be heard to complain very loudly that he did not sign up to a risk of his reputation being harmed by the principal pulling the guarantee in circumstances where the builder believes he will ultimately be found not to have been in breach. And that is where the respective interests conflict, the need for precision in drafting becomes critical, and the real cause of disputes arises.
So, in the eternal pursuit of objectivity and certainty in the determination of commercial disputes, the Courts carefully analyse relevant terms of the contract to ascertain the parties’ presumed intentions. Often, the traditional first requirement for an interlocutory injunction, a serious question to be tried, is readily satisfied when the dispute crystalises to a debate about whether the principal is entitled on the proper construction of the contract to have recourse.
Recent decisions such as that of the Court of Appeal in Sugar Australia v Lend Lease suggest a more robust approach ought be taken (or re-taken) to the first enquiry which has often in the past been virtually skated over. Therefore, where the dispute concerns a proper construction of the contract, the Court ought resolve any construction issues rather than let those issues satisfy the requirement for a serious question. That, of course, may not be the end of the matter, because a ‘serious
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question’ will often arise as to whether there has been a breach of one party or the other which could entitle or disentitle rights to recourse.
At that point of the analysis then, one asks: assuming a serious question can be established, what part, and if so, to what extent, should evidence of possible reputational harm have in weighing the balance of convenience?
That exercise should clearly not be undertaken blind to the terms of the contract and the parties’ evident agreement about the consequences each is presumed to have understood, assumed and expected in the event of a call. Here, the anti-reputational harm school is on firmer ground. Where the construction exercise reveals that the relevant provisions were intended not solely as security for performance, but also to provide for the allocation of risk as to who would be out of pocket pending the determination of a dispute, it is counter-intuitive at least, and contrary to the proper development of principle, to permit after-the-event complaints about potential reputational harm to somehow undermine or rewrite those risk allocation arrangements. On that approach, reputational harm should attract little, if any, weight in the exercise of discretion.
Moreover, as Young JA observed in Lucas Stewart v Hemmes, the common law has long recognised that normally in cases of breach of contract, damages for loss of reputation are not awarded. That is powerful, albeit collateral support, for the proposition that reputational harm should not weigh heavily in the balance.
Further, on the nature of any damages that might flow, if an injunction is not granted, and from what turns out to be an unlawful call on security, the builder’s claim for damages will be based on a breach of contract by the principal, constituted by recourse in contravention of the terms of the contract. That takes us back full circle to a proper construction of the terms of the contract, and whether for instance, the principal is entitled to recourse even on the basis of an asserted claim (or bona fide or genuine belief) that the builder is in breach and has caused the principal loss and damage, which may be well short, temporally and on the merits, of any future determination by arbitral award or curial judgment. But that will all depend on the language agreed by the parties and the mechanisms by which those risks were to be managed as between them.
The pro-reputational harm school argues that an injunction should be granted because any damages which might flow from any reputational harm, will be difficult to prove and/or quantify. Putting the illuminating statement by Young JA referred to above to one side for the moment, difficulties in proof of quantification of loss and damage have never inhibited Courts from “doing the best they can” where the other elements of a cause of action have been fulfilled. Also, the asserted difficulties with proof and quantification of such damages may tend to belie the actual weight of the concerns. If ultimately, a builder is unable to present to a Court compelling evidence to show that as a result of the guarantee being wrongfully called up, its reputation in
Recourse to securities: reputational harm – does it always tip the scales?
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the marketplace or its relationship with its financiers have been objectively and quantifiably damaged, one needs to ask, with a fair degree of commercial reality and perhaps scepticism: why?
The simple fact is that claims of potential reputational harm are reasonably easy to make and very difficult to refute. There is a good reason for that: they are commonly based on evidence as to potential, prospective events, which by their very nature are subject to a multitude of vagaries and imponderables. Were it otherwise, that is, an applicant complaining of potential reputational harm was able to adduce evidence which went some way to objectively describing and financially quantifying what the ramifications might be if an injunction is not granted, then that applicant risks drifting precariously into potential failing on its application because he would have inadvertently demonstrated that damages will probably be an adequate remedy. So, steering clear of the exercise of trying to add real weight to the reputational harm concerns by putting some tangibility to them, effectively becomes necessary to make out the claim.
Conclusion
Courts appear to be returning to a more robust approach to assessing claims of reputational harm. That approach is consistent with the primacy of the proper construction of the parties’ agreement and the commercial risks each agreed to assume, and keeping them to their bargain. It will not defeat, but rather will inform, the equitable discretion required in determining applications to enjoin recourse to security, with enhanced objectivity and certainty, usually craved by parties and their advisors in assessing prospects in the face of a threatened call. It also moves away from the perils of courts having to assess often subjective and speculative evidence clothed in assertions of dire and irreparable harm if relief is not granted, and toward re-establishing commercial confidence in bank guarantees (for instance) as once again being (almost) as good as cash.
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