Recourse to bank guarantees Pt II

Key takeaways

Several recent Western Australian Supreme Court of Appeal (WASCA) decisions have been handed down in the litigation between CPB Contractors Pty Ltd (CPB) and JKC Australia LNG Pty Ltd (JKC), in relation to JKC’s right to call upon unconditional bank guarantees.

This article follows on from our previous piece entitled “Calls on bank guarantees and enforcement of arbitration agreements", in which we considered the findings of the primary judge in CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [2017] WASC 112, who rejected CPB’s initial application for an interlocutory injunction restraining JKC from calling upon the bank guarantees.

The various decisions handed down in this litigation (from Courts of all levels) confirm the conventional position in Australia in relation to unconditional guarantees.

Background

JKC, the head contractor on the Ichthys LNG Project (Project), entered into a subcontract with CPB for the performance of onshore works in relation to the Project.

Pursuant to Article 35 of the subcontract, CPB agreed to provide unconditional bank guarantees in favour of JKC. Importantly, Article 35.3 read:

1. Contractor may have recourse to the Bank Guarantee(s) at any time in order to recover any amounts that are payable by Subcontractor to Contractor on demand.
2. Subcontractor waives any right that it may have to obtain an injunction or any other remedy or right against any party in respect of Contractor having recourse to the Bank Guarantee(s).

A dispute arose regarding JKC’s assessment of several extension of time (EOT) claims made by CPB in relation to Project milestones. On 28 February 2017, JKC wrote to CPB claiming liquidated damages in the amount of $39,225,000, for CPB’s failure to meet various completion dates under the subcontract.

Various correspondence was exchanged by the parties which ultimately ended with CPB issuing a notice of dispute under the subcontract on 10 March 2017 in relation to JKC’s entitlement to call upon the bank guarantees to satisfy its liquidated damages claim.

On 20 March 2017, CPB commenced the primary proceedings, seeking an injunction to prevent JKC from exercising its right under Article 35.3(a) and calling upon the bank guarantees until after the determination of the EOT claims. In the alternative, CPB claimed an injunction requiring JKC to comply with the dispute resolution clause of the subcontract (rather than calling on the bank guarantees) to resolve the EOT claims.

At the same time, CPB applied for an urgent interlocutory injunction in the same terms.

On 21 March 2017, the primary judge granted an ex parte interim injunction restraining JKC from calling upon the bank guarantees, pending the outcome of CPB’s application for an interlocutory injunction.

On 20 April 2017, Justice Le Miere dismissed CPB’s application for an interlocutory injunction.¹ CPB appealed the decision to the WASCA.

On 27 April 2017, the WASCA extended the operation of the interim injunction to allow CPB to appeal Le Miere J’s decision.²

WASCA – grounds of appeal

On 25 May 2017, the WASCA heard the matter on appeal. CPB appealed the primary judge’s decision not to grant its interlocutory injunction on two alternate grounds:

1. The primary judge erred by failing to grant an injunction to restrain JKC from calling upon the bank guarantees while the dispute resolution process in Article 57 of the subcontract was in progress.
2. The primary judge erred in his construction of the wording of Article 35.3(a). CPB submitted that the correct construction was that an amount is only “payable” under Article 35.3(a) if, objectively and indisputably, CPB had a contractual obligation to pay the amount.

WASCA – appeal decision

On 30 June 2017, WASCA delivered its decision unanimously dismissing CPB’s appeal.³

In relation to the first ground of appeal, the WASCA held that any implied duty on JKC to cooperate “does not rise above the promises made by the parties”⁴ and cannot override express provisions of the subcontract.⁵

In relation to the second ground of appeal, the WASCA agreed with the primary judge that CPB’s construction of Article 35.3(a) was inconsistent with the subcontract as a whole and that, if adopted, would undermine the purpose of the unconditional guarantee.

On the same day, the parties agreed by consent to extend the operation of the interim injunction to 6 July 2017, to allow CPB time to apply for an interlocutory injunction pending the determination of its application for special leave to appeal to the High Court of Australia (HCA).⁶

High Court of Australia

On 3 July 2017, CPB made its application to the HCA seeking special leave to appeal the decision of the WASCA.

On 6 July 2017, the WASCA dismissed CPB’s application for a further interim injunction to preserve the subject matter of the litigation while its special leave application was being decided.⁷ This decision was based on the fact that the court did not believe CPB’s special leave application (to overturn the WASCA’s decision not to allow an interlocutory injunction) had substantial prospects of succeeding, and was not persuaded to exercise its extraordinary jurisdiction to grant an interim injunction in the circumstances.

On 14 July 2017, CPB applied to the HCA for an interim injunction pending the outcome of its special leave application. The HCA was similarly unconvinced of CPB’s chances of successfully being granted special leave, and refused to grant the interim injunction. We expect that CPB has abandoned its application for special leave.

Implications

Despite all of its attempts, CPB failed to prevent JKC from having recourse to the unconditional bank guarantees it had agreed to give under the subcontract.

The case ultimately turned on the correct reading of Article 35.3(a), in particular the construction of the word ‘payable’ as a trigger to calling upon the bank guarantees.

The various decisions handed down in this litigation (from Courts of all levels) confirm the conventional position in Australia in relation to unconditional guarantees. That is, that the express words of the contract are the means by which the rights and obligations of the parties are to be determined. Unless a vitiating factor such as fraud or unconscionable conduct can be shown, parties will be bound by their contractual promises.

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¹ CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [2017] WASC 112
² CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [2017] WASCA 85
3 CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [2017] WASCA 123.
⁴ CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [2017] WASCA 123 at 77.
⁵ Alcatel Australia Ltd v Scarcella [1998] NSWSC 483; Servcorp WA Pty Ltd v Perron Investments Pty Ltd [2016] WASCA 7.
⁶ CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [2017] WASCA 132 at 2.
⁷ CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [2017] WASCA 132 at 5.

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