Security under construction contracts

Construction contracts in use in Australia often require security to be provided by the contractor for the performance of its obligations under the contract.  Commonly, the security is in the form of retention money, bank guarantees, unconditional undertakings, performance bonds or insurance bonds.

A call on a bank guarantee, performance bond or insurance bond can have a drastic impact on the cash flow and liquidity of contractors

A call on a bank guarantee, performance bond or insurance bond can have a drastic impact on the cash flow and liquidity of contractors.  Accordingly, the threat of recourse to one of any of a bank guarantee, insurance bond or performance bond is a serious issue for a contractor.

Whilst not found in the Australian Standard general conditions, savvy developers will typically insist on the inclusion of a term that purports to prohibit a builder from applying to Court to seek an injunction to restrain a developer from having recourse to security – these are also known as “no injunction clauses”.

This article outlines the law in New South Wales on “no injunction clauses” in construction contracts.

G&S Engineering Services v MACH Energy Australia[1]

On 11 April 2019, the Hon. Justice Stevenson delivered judgment in G&S Engineering Services Pty Ltd v MACH Energy Australia Pty Ltd [2019] NSWSC 407.  This matter involved a dispute about whether MACH Energy (and others) were entitled to call on bank guarantees in the face of a “no injunction clause”.

Briefly stated, the facts were as follows:

1. G&S Engineering and DRA Pacific (G&S Engineering) entered into contract with MACH Energy Australia Pty Ltd to carry out works relating to coal handling and preparation plant and train load out facility for a coal mine.
2. The contract included a promise by G&S Engineering that it would not seek to restrain (by injunction) MACH from calling on the surety bonds, even where MACH’s entitlement to any payment was disputed. This was referred to as a “no injunction clause”.
3. MACH asserted it had a claim against the G&S Engineering in the sum of $3.8 million, being a claim for liquidated damages. MACH wished to have recourse to the security to satisfy its claim against G&S Engineering.
4. G&S Engineering disputed that MACH had any entitlement to have recourse to the security because G&S Engineering asserted that:
   • MACH was required to release the security; and
   • MACH was not entitled to call on the security until final judicial determination of whether MACH was “owed money” or that MACH had “become entitled to exercise a right under the contract in respect of money owing” to MACH.
5. The security in dispute comprised four surety bonds provided by the G&S Engineering in the total value of approximately $7.2 million.
6. G&S Engineering applied to the Supreme Court for an order restraining MACH from making a call on the security.

Are “no injunction clauses enforceable”?

One of the issues before the Court was whether the “no injunction clause” had the effect of dis-entitling G&S Engineering from seeking an injunction to restrain the MACH from seeking recourse to the security.

The Court made clear that a “no injunction clause” is a purported ouster of the jurisdiction of the Supreme Court and thus, as a matter of public policy, unenforceable.  Accordingly, the “no injunction clause” in this case was unenforceable.

Attempts have been made to draw a distinction on the proper construction of a “no injunction clause” as, on the one hand an ouster of the Court’s jurisdiction, and on the other, a contractual provision which limits the rights and remedies available to a party.[2]  No such distinction was drawn in the case of G&S Engineering.

Anti-suit injunctions are an equitable relief available to restrain unconscionable or otherwise improper exercise of legal rights.  Anti-suit injunctions have had application in cases involving conflict of laws where a claim is being prosecuted in a foreign jurisdiction and an anti-suit injunction is sought to prevent that same claim being agitated in an Australian jurisdiction.

What remaining role do “no injunction clauses” play?

The secondary question that arose is whether the “no injunction clause” could be utilised to construe the balance of the contract.

The Court found that despite the “no injunction clause” being against public policy and unenforceable, it may still be considered by the Court in construing the contract (as a whole) in respect of a “contract interpretation” argument where a dispute exists about the parties’ intention, at the time of entering the contract.

A similar finding was made in the Western Australian Court of Appeal decision in CPB Contractors v JKC Australia Lng (No 2) [2017] WASCA 123.

Dual purpose of security

The Court found that the parties intended that the security was provided not only as a means for MACH to overcome difficulties in recovering from G&S Engineering, if it proved unable to pay, but also as a means to allocate the risk as to who should be out–of-pocket pending resolution of any dispute (in this case, the risk was allocated in favour of MACH).  This was a relevant factor to the ultimate question of whether MACH should be restrained from calling on the security which counted against the position of G&S Engineering.

Preserving security and “no injunction clauses”

Builders who are faced with a “no injunction clause” ought to tread carefully.  Whilst the decision in G&S Engineering has emphatically found that a “no-injunction clause” which ousts the jurisdiction of the Court to be unenforceable – there is scope (at least potentially) for a different construction to be taken which would inhibit a builders’ rights and remedies.

Which party is entitled to call on the security? 

A further issue before the Court arose as a consequence of a Novation Deed executed by the parties.  The Novation Deed had the effect of substituting the MACH Mount Pleasant Operations Pty Ltd as “the Company” for the purposes of the relevant contract.  However, novated company was not the beneficiary named in the security instruments.  The issue was whether only the named beneficiary (the MACH Energy) could have recourse to the security, on the terms of the security instrument itself.  For the purposes of the case the issue did not have to be resolved, but was a live issue and was a factor which weighed in favour of the Court restraining MACH from calling on the security.

Lessons

The key take home points from the decision in G&S are:

• “No injunction clauses” may not be enforceable, so a builder who is faced with the possibility of a bank guarantee or surety bond being called ought to seek legal advice immediately (regardless of what the contract says) on whether it is possible to seek an injunction to restrain the principal from making the call.
• Whilst “no injunction clauses” are unlikely to be enforceable, builders should not ignore those clauses during tender negotiations, as unenforceable provisions of a contract may still be taken into consideration by the Court, for the purpose of interpreting the contract.
• Parties need to ensure that the beneficiaries of any security instrument lodged by a contractor are updated to reflect any novated company after novation agreements are executed.
• Parties should ensure that the terms of a contract clearly state the purpose of security, that is whether security is given as a means to allocate the risk of which party should be out of pocket pending resolution of any dispute.

[1] G&S Engineering Services Pty Ltd v MACH Energy Australia Pty Ltd [2019] NSWSC 407

[2] See generally: CPB Contractors Pty Ltd v JKC Australia Lng Pty Ltd (No 2) [2017] WASCA 123

Enquiries

If you have any questions about this article, or require any further information about security given under head contracts, please contact Mark Yum or Nelson Arias-Alvarez on (02) 9324 5300.