When security under building contracts cease to operate as risk allocation devices.

It is well known that the function of security under building contracts can act as risk allocation devices, meaning that a ‘pay now, argue later’ approach is adopted making it difficult for a contractor to obtain an injunction to restrain a wrongful call by a principal. But what happens when it is arguable that the bank guarantee should have already been returned at the time of the attempted call?

In Synergy Construct Australia Pty Ltd v. GSA North Terrace Pty Limited ATF GSA North Terrace Unit Trust [2025] SASCA 72 the South Australian Court of Appeal granted an interlocutory injunction restraining the principal from having recourse to bank guarantees because there was serious question to be tried as to whether the period of time the principal was entitled to retain the guarantees had come to an end.

The respondent principal engaged the applicant contractor to design and construct student accommodation under a contract which included the AS 4902-2000 general conditions of contract. The contract permitted the principal to have recourse to the bank guarantees at any time to (amongst other things) “satisfy any bona fide claim the principal may have against the contractor”, but that the principal’s entitlement to security would cease 14 days after the final certificate was issued.

During the defects liability period, the parties entered into an agreement for the rectification of certain defects and the release of bank guarantees (“DLP Agreement”). The superintendent issued a final certificate but assessed the contractor was not entitled, under the DLP Agreement, to the return of its bank guarantees. The contractor issued a notice of dispute challenging the superintendent’s assessment and the principal responded by contending the final certificate was invalid.

Whilst the Court of Appeal found that the bank guarantees were to act as risk allocation devices, it nonetheless granted an interlocutory injunction restraining the principal from having recourse to the bank guarantees. It found there was a serious question to be tried as to whether the principal had come under a contractual obligation to return the bank guarantees prior to the attempted call, either under the DLP Agreement, or because the contract required the return of the bank guarantees to the contractor 14 days after the final certificate.

The Court of Appeal considered whether damages were an adequate remedy for the principal were an injunction to be granted and whether the balance of convenience favoured the grant of an injunction pending the final determination of the serious question to be tried. As to the balance of convenience, the Court of Appeal said the risk allocation role the bank guarantees performed during the period the principal was entitled to hold them, was relevant to assessing the prejudice to the principal if an injunction were granted. However, it noted the risk allocation role the bank guarantees performed during that period, could not control the outcome of assessing the balance of convenience where there was a serious question to be tried as to whether that period had come to an end.

Nicholas Gallina and Fabian Brimfield

Liability limited by a scheme approved under professional standards legislation