The recent case of Saipem Australia Pty Ltd v GLNG Operations Pty Ltd has reaffirmed the sacrosanct nature of bank guarantees. The case considered the operation of section 67J of the Queensland Building and Construction Commission Act 1991 (Qld) (QBCCA).
Section 67J of the QBCCA provides that a party to a building contract can use a security or retention amount in order to obtain an amount owed under the contract, provided they give written notice of their intention to do so and the amount owed. Further, subsection 2 qualifies that in order to comply with this section, a notice must be given within 28 days after the contracting party becomes aware, or ought to reasonably become aware, of their right to retain or obtain the amount owed. Section 67E of the QBCCA renders any term of a building contract which does not comply with section 67J unenforceable.
Saipem and GLNG Operations entered into an agreement for the construction of a gas transmission pipeline. Saipem informed GLNG operations they were experiencing cash flow problems. In order to assist with this, GLNG Operations agreed to make certain advance payments, which were referred to in the contract as ‘Milestone Advance Payments’. Additionally, the contract provided for two bonus payments if the contracted work was completed within a specific time window (the ‘bonus window’).
The contact expressly outlined that the Milestone Advance Payments were to be repaid by Saipem, however it also contained a number of set off provisions. Clause 60.3(c) provided that GLNG Operations was able to set off or deduct any amount due payable to Saipem under or in relation to the Contract or the Works, in respect of the Milestone Advance Payments. Clause 61(e) provided that any Milestone Advance Payments which had not yet been repaid, were able to be set off or deducted against the companies liability to pay Bonus Payments. Lastly, clause 60.5 required Saipem to provide bank guarantees to GLNG Operations for an amount equal to the Milestone Advance Payments (“Milestone Advance Security”).
After Saipem completed the work, a dispute arose between the parties regarding the extension of the bonus window. GLNG Operations called for repayment of the balance of the Milestone Advance Payments, while Saipem sought to set off its liability to repay the advance payments against its asserted entitlement to the bonus payments.
Saipem applied to the court to enjoin GLNG Operations from calling on the milestone payment security. GLNG Operations argued that section 67J should be read down in order to be limited to only payments under building contracts for building work. Following this construction they argued it should not apply to any other payments under contracts involving building work, such as those in dispute. Subsequently, they argued that the security under the Milestone Payments did not fall within section 67J, as the purpose of this security was to repay the Milestone Advance Payments, not to provide payment for building work.
The court rejected the proposition that section 67J of the QBCCA precluded reliance on the Milestone Advance Security. The court saw no reason to limit the proposition, noting at  that “a building contract need not be a contract which is exclusively concerned with building work”.
Saipem argued that section 67J was limited to monies due and owing, thus, as there was a dispute regarding the payment of the bonus payments, GLNG Operations was not yet entitled to issue a notice under section 67J. His honour accepted this, noting that the 28 days in section 67J(2) does not begin until after the right of the owner to recover an amount from the building contract has accrued. GLNG argued that despite this, Saipem had no right of set off under the contract, nor to the bonus payments. Saipem claimed they had a claim to equitable set off.
The Court noted that Saipem did have a prima facie case of equitable set off. While not expressed in the judgement, in reaching this conclusion it is clear that Saipem would also have a prima facie case for its preferred construction of section 67J.
In determining the application for the injunction the Judge addressed the question of the balance of convenience and held that bank guarantees had the commercial purpose of being regarded equivalent to cash. His honour referred to the decision in Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd emphasising that the purpose of bank guarantees in contracts was to provide security for any valid claim against the contractor, and to allocate risk between the parties pending the resolution of any dispute against them.
This Judge outlined the general rule that a court will not enjoin the issuer of a performance guarantee or bond. However his honour also looked at the decision of Clough Engineering Ltd v Oil and Natural Gas Corporation, which outlined three exceptions to this general rule. These include; fraud or unconscionable conduct on behalf of the party in whose favour the bank guarantee has been given, the breach of a contractual promise, or the general principles of enforcing injunctions in negative stipulations in contracts.
His honour noted that these principles in conjunction with the commercial background of the contract, absent clear wording, do not allow for a construction inconsistent with an agreed allocation of risk in a contract. Thus, in light of the parties’ implicit agreement on the allocation of risk regarding who would be out of pocket in the case of a dispute, his honour held that the balance of convenience lay in GLNG Operations favour, therefore, the injunction was not granted.
This decision confirms the highly regarded nature of bank guarantees by the courts. It provides a basis for the proposition that the courts will not allocate risk in a contractual dispute in a manner which is adverse to that as represented in the contract.
Aitken Whyte Lawyers
Level 2, 303 Adelaide Street, Brisbane
Ph: +617 3229 4459
Fax: +617 3211 9311