Kawasaki Heavy Industries, Ltd v Laing O’Rourke Australia Constructions Pty Ltd [2017] NSWCA 291 (17 November 2017)

COURT OF APPEAL
SUPREME COURT
NEW SOUTH WALES

KAWASAKI HEAVY INDUSTRIES LTD 
(Appellant)

V

LAING O’ROURKE AUSTRALIA CONSTRUCTION PTY LTD
(Respondent)

 

FILE NO: 2017/79847
HEARING DATES: 21-22 August 2017
DATE OF ORDERS: 17 November 2017
DECISION DATE: 17 November 2017
BEFORE: Meagher JA, Payne JA, White JA
DECISION: (1) Leave to appeal granted;
(2) Appeal dismissed;
(3) Appellant pay the respondent’s costs of the
application and appeal.
CATCHWORDS: CONTRACT – construction – construction contracts – performance bonds – injunction – serious question to be tried – balance of convenience
INTERNATIONAL ARBITRATION – interlocutory relief where underlying dispute to be determined by arbitral tribunal

 

headnote

[This headnote is not to be read as part of the judgment]

The appellant (Kawasaki) and the respondent (Laing O’Rourke) are parties to a contract with JKC, the head contractor of a cryogenic tank project near Darwin (the Subcontract). Under the Subcontract, the parties agreed to provide project services to JKC. The Subcontract also required Kawasaki and Laing O’Rourke to provide performance bonds and advance payment bonds to JKC.

To regulate their joint and several obligations under the Subcontract, Kawasaki and Laing O’Rourke entered into a Consortium Agreement. This agreement outlined the scope of work each party was responsible for under the Subcontract. By clause 14, Kawasaki agreed to take responsibility for providing the performance bonds and advance payment bonds to JKC. In the same clause of the Consortium Agreement, Laing O’Rourke agreed to provide surety bonds to Kawasaki.

By a third agreement (the LORAC Subcontract), Laing O’Rourke agreed to perform some of the work allocated to Kawasaki by the Consortium Agreement. The LORAC Subcontract in Article 6 also provided for the procurement of bonds on behalf of Laing O’Rourke to Kawasaki.

Under the Consortium Agreement, Laing O’Rourke and Kawasaki agreed to a regime for the determination of all disputes between them by international arbitration in Singapore. However, that regime allowed for interlocutory relief to be sought from a court of competent jurisdiction.

Following a dispute, Kawasaki made a call on the bonds. Laing O’Rourke applied to the Supreme Court of New South Wales restrain Kawasaki from calling on the bonds on the basis that there was a serious question to be tried about whether Kawasaki was entitled to call on the bonds in circumstances where JKC had yet to call on the corresponding bonds provided to JKC under the Subcontract. The primary judge ordered the continuation of the interlocutory injunction.

The main issues on appeal were:

(i)    whether there was a serious question to be tried that, on the proper construction of the Consortium Agreement and the LORAC Subcontract, Kawasaki was not entitled to call on the surety bonds until JKC had called on the Kawasaki bonds;

(ii)    whether the primary judge should have determined the proper construction of the Consortium Agreement and the LORAC Subcontract “as if on a final basis”; and

(iii)    whether the primary judge erred by finding that the balance of convenience favoured the continuation of the interlocutory injunction.

The Court (Meagher, Payne and White JJA) dismissing the appealheld:

In relation to issue (i), at [86]:

There was a serious question to be tried about whether Kawasaki was entitled to call upon the performance bonds issued on behalf of Laing O’Rourke under the Consortium Agreement and the LORAC Subcontract in circumstances where JKC had not made a call upon the Kawasaki bonds.

Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd [2008] FCAFC 136; (2008) 249 ALR 458; Lucas Stewart Pty Ltd v Hemmes Hermitage Pty Ltd [2010] NSWCA 283 and Simic v NSW Land and Housing Corporation [2016] HCA 47; (2016) 91 ALJR 108 considered.

In relation to issue (ii), at [95], [102]:

(2) The primary judge was not asked to determine this case “as if” on a final basis. The primary judge’s conclusion that he should determine the case on the basis of a serious question to be tried was correct.

Cape Lambert Resources Ltd v MCC Australia Sanjin Mining Pty Ltd [2013] WASCA 66; Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [2015] VSCA 987 considered.

In relation to issue (iii), at [111], [115], [118], [120], [123], [125]:

(3) The primary judge did not err in determining that the balance of convenience favoured the continuation of the interlocutory injunction. In particular, it was not shown that the primary judge gave insufficient weight to the matters relied upon by Kawasaki in opposition to the grant of the injunction.

Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [2015] VSCA 98; (2015) BCL 407; RCR O’Donnell Griffin Pty Ltd v Forge Group Power Pty Ltd (Receivers and Managers Appointed) (in liq)[2016] QCA 214; (2016) 32 BLC 406 considered.

Judgment

  1. THE COURT: This is an application for leave to appeal from the decision of the primary judge, Stevenson J, delivered on 5 May 2017, continuing an interlocutory injunction against the calling of certain bonds: Laing O’Rourke Australia Construction Pty Ltd v Kawasaki Heavy Industries, Ltd [2017] NSWSC 541.

Overview

  1. The rights and obligations of the parties are governed by three contracts. By the first (the JKC Subcontract), the applicant (Kawasaki or KHI) and respondent (Laing O’Rourke or LORAC) jointly and severally agreed to perform services in relation to a liquefied natural gas project as subcontractors for JKC Australia LNG Pty Ltd (JKC). The second contract (the Consortium Agreement), which was aptly described by the applicant as a “rather unusual agreement”, regulates the rights and obligations as between the two subcontractors, including by allocating the scope of work to be performed under the JKC Subcontract. By the third (the LORAC Subcontract), Laing O’Rourke agreed with Kawasaki to perform in addition some of the work allocated to Kawasaki by the Consortium Agreement.
  2. The JKC Subcontract requires the two subcontractors to provide performance bonds and advance payment bonds to JKC. By clause 14 of the Consortium Agreement, Kawasaki agreed to take responsibility for providing those performance bonds and advance payment bonds to the head contractor. By the same clause, Laing O’Rourke agreed to provide surety bonds to Kawasaki. These bonds related either to performance of work obligations or to repayment of advance payments.
  3. Following a dispute concerning the project, Laing O’Rourke applied to restrain Kawasaki from calling on the bonds which the former had provided. Under the Consortium Agreement, Laing O’Rourke and Kawasaki agreed to a regime for the determination of all disputes between them by international arbitration in Singapore. However, that regime allowed for interlocutory relief to be sought from a court of competent jurisdiction. In that context, the principal question before the primary judge was whether there was a serious question to be tried that, properly construed, the Consortium Agreement and the LORAC Subcontract prevented Kawasaki from calling on the bonds provided by Laing O’Rourke for the benefit of Kawasaki unless JKC had called on the corresponding bonds provided by Kawasaki for the benefit of JKC.
  4. In a careful and thorough judgment, the primary judge continued an interlocutory injunction restraining Kawasaki from calling on the surety bonds provided by Laing O’Rourke. For the reasons which follow, we would grant leave to appeal but dismiss the appeal from his Honour’s orders.

Background Facts

The JKC Subcontract

  1. JKC is the head contractor in relation to a project run by Inpex Operations Australia Pty Ltd for the construction of four cryogenic tanks used to store liquefied natural gas at a site near Darwin.
  2. On 26 April 2012, Laing O’Rourke and Kawasaki entered into the JKC Subcontract under which they as a consortium agreed to provide project management, engineering and other services to JKC in relation to the cryogenic tanks project.
  3. Article 2.1 of the JKC Subcontract defines JKC as the “Contractor”, and Kawasaki and Laing O’Rourke as the “Subcontractor”. Under Article 8.1, Kawasaki and Laing O’Rourke are “jointly and severally liable to the Contractor for the performance of the Project in accordance with the JKC Subcontract.”
  4. The JKC Subcontract also requires that the JKC Subcontractor provide:
  1. an unconditional and irrevocable performance bond, described as Bank Guarantee(s), initially equal to 10 per cent of the JKC Subcontract Price, comprising an Initial Bank Guarantee and a Warranty Bank Guarantee, with each equal to five per cent of the JKC Subcontract Price (Article 35.1); and
  2. an Advance Payment Guarantee to secure the obligation of the Subcontractor to repay an advance payment made by JKC to the consortium by way of an interest-free loan (Article 34.9).

Consortium Agreement

  1. To regulate their joint and several obligations, Kawasaki and Laing O’Rourke entered into the Consortium Agreement on 26 April 2012. An important feature of that contract was the agreement that Kawasaki alone would provide the bonds referred to immediately above for JKC’s benefit on behalf of both itself and Laing O’Rourke (the Kawasaki Bonds). While those bonds are not in evidence, this agreement is reflected in clause 14 of the Consortium Agreement, on the construction of which the present application turns:

“Clause 14 – Security

Security

(a) KHI must provide Security in respect of the Subcontract (to the extent required by the Subcontract), and must bear itself the costs and obligations associated with the Security.

(b) If a call is made on the Security such that it results in the Parties not contributing to the call in proportion to their liability pursuant to this Agreement, then the Party or Parties that have contributed less must, on demand, pay the difference to the Party or Parties that have contributed more.

(c) Where a call is made on the Security and it is not possible to determine at the date of such call which Party is liable for the event which led to the call on the Security, then such call will be borne by KHI until it is determined by the Steering Committee.

(d) The Parties must use their best endeavours to mitigate any loss suffered as a result of a call on any KHI.

(e) Laing O’Rourke must provide surety bonds to KHI in the following amounts:

(i) 10% of the value of the relevant portion of the Subcontract Price which relates to LORAC’s Allocated Scope of Work and the LORAC Subcontract Works, for securing Laing O’Rourke’s due performance of its obligations under the Subcontract; and

(ii) that portion of the Advance Payment which relates to the LORAC Allocated Scope of Work and the LORAC Subcontract Works, for securing payment to Laing O’Rourke of its portion of the Advance Payment in accordance with the Subcontract.

(f) The surety bonds in clause 14(e) must be provided by Laing O’Rourke to KHI at the same time when KHI is obliged to submit the Security under the Subcontract, and Laing O’Rourke must bear itself the costs and obligations associated with the surety bonds. Any other conditions of the surety bonds submitted by Laing O’Rourke to KHI shall, unless otherwise agreed by the Parties before submission, be the same as the Security submitted to by KHI in accordance with the Subcontract.

(g) The surety bonds will be required for the same duration as the relevant Security is required under the Subcontract, and must be released by KHI at the same time that the Security is released by the Contractor under the Subcontract. KHI must provide Laing O’Rourke with immediate notice of a call on KHI’s Security.”

  1. Clause 19 of the Consortium Agreement provides that all disputes between Kawasaki and Laing O’Rourke are to be determined by international arbitration under the International Chamber of Commerce Rules. The seat of the arbitration is to be in Singapore. The governing law of the arbitration is Singapore law. For present purposes, the only part of clause 19 (the dispute resolution clause) which should be noted is clause 19.1:

“Clause 19 – Dispute resolution

“19.   Dispute Resolution

19.1   No proceedings

A Party must not start court proceedings (except proceedings seeking    interlocutory relief) in respect of a dispute arising under or in    connection with this agreement unless it has complied with this clause   19. ….”

  1. In relation to performance of the JKC Subcontract work, the Consortium Agreement provides that:
  1. Laing O’Rourke would be responsible for the civil works (the LORAC Allocated Scope of Work); and
  2. Kawasaki would be responsible for mechanical, piping, equipment and electrical and instrumentation works as well as tests and commissioning (the KHI Allocated Scope of Work).
  1. The parties also agreed that Laing O’Rourke would be responsible for performing certain obligations which were within the KHI Allocated Scope of Work. To reflect this, they entered into a separate agreement, referred to as the “LORAC Subcontract”, and described at [15]-[18] below.
  2. At the outset, the following features of the surety bond obligation in clause 14 of the Consortium Agreement may be noted:
  1. if JKC made a call on the Kawasaki bonds, then both Kawasaki and Laing O’Rourke would have to contribute to the call in proportion to their liability pursuant to the Consortium Agreement (sub-clause 14(b));
  2. in that event, if it could not be determined or agreed as between Kawasaki and Laing O’Rourke which party was “liable for the event which led to the call” on the Kawasaki bonds, then such call would “be borne by KHI until it is determined by the Steering Committee”, a body created under the dispute resolution provisions of the Consortium Agreement (clause 10 and sub-clause 14(c));
  3. Laing O’Rourke would provide “surety bonds” to Kawasaki:
  1. in the amount of 10 per cent of the value of the relevant portion of the JKC Subcontract Price which relates to LORAC’s Allocated Scope of Work and the LORAC Subcontract Works; and
  2. in the amount of the portion of the Advance Payment from JKC which relates to the LORAC Allocated Scope of Work and the LORAC Subcontract Works, “for securing payment to Laing O’Rourke of its portion of the Advance Payment in accordance with the Subcontract” (sub-clause 14(e)); and
  1. the surety bonds must be on the same conditions as the Kawasaki bonds unless otherwise agreed, for the same duration as the Kawasaki Bonds are required under the JKC Subcontract, and released by KHI at the same time that the Kawasaki Bonds are released by JKC under the JKC Subcontract (sub-clauses 14(f) and (g)).

LORAC Subcontract

  1. The second of the relevant agreements between Kawasaki and Laing O’Rourke is the LORAC Subcontract, which includes a “Purchase Order” and “Special Terms and Conditions”. An earlier draft purchase order had been issued by Kawasaki to Laing O’Rourke pursuant to Special Conditions (g) to (l) of the Consortium Agreement. However, the parties proceeded on the basis that the relevant Purchase Order was that dated 12 June 2012.

  2. That Purchase Order provides in Article 1 that the following documents constitute “an integral part” of it and that, in the event of conflict between the LORAC Subcontract documents, their “order of precedence” is as follows:
  1. the Purchase Order itself;
  2. the Special Terms and Conditions attached to the Purchase Order;
  3. the Consortium Agreement;
  4. another document related to the technical specifications for erection works which is not relevant for present purposes;
  5. the General Terms and Conditions attached to the JKC Subcontract; and
  6. the EPC-Cryogenic Tanks Instructions to Tenderers.
  1. By Article 2 of the Purchase Order, Laing O’Rourke agreed to perform the following obligations which, under the Consortium Agreement, were within the KHI Allocated Scope of Work:

“LORAC shall provide materials and equipment, and shall perform all the works whatsoever nature or description, as set forth in TECHNICAL SPECIFICATIONS and as required under LOCAL SUBCONTRACT (hereinafter called “LORAC SUBCONTRACT WORKS”).”

  1. Another key provision of the LORAC Subcontract is the requirement in sub-Article 2.1.1 of the Special Terms and Conditions that a 10 per cent “Advance Payment” be paid within 30 days of Kawasaki receiving the bonds stipulated in Article 6 of the same document. Article 6 reads:

““Article 6: BONDS

LORAC shall deliver to KHI surety bonds in the form set out in Annexure 1A of SUBCONTRACT GENERAL TERMS & CONDITIONS pursuant to Article 35.1 ‘Bank Guarantees’ of SUBCONTRACT GENERAL TERMS & CONDITIONS and Article 16 [it is common ground this should be read as Clause 14] ‘Security’ of CONSORTIUM AGREEMENT.

6.1 Advance Payment Bond

A surety bond for the Advance Payment Bond shall be issued and submitted to KHI for a sum equal to ten per cent (10%) of LORAC SUBCONTRACT PRICE within thirty (30) days after the Effective Date of LORAC SUBCONTRACT.

The Advance Payment Bond must be valid from the Effective Date of LORAC SUBCONTRACT until the full amount of the Advance Payment has been repaid.

6.2 Initial Bond

Surety bonds for the Initial Bond shall be issued and submitted to KHI within thirty (30) days after the Effective Date of LORAC SUBCONTRACT.

The amount of the Initial Bond must be equal to ten per cent (10%) of LORAC SUBCONTRACT PRICE and must be provided separately as two (2) bonds, each equal to five per cent (5%) of LORAC SUBCONTRACT PRICE.

One of Initial Bond must be valid from the Effective Date of LORAC SUBCONTRACT until thirty (30) days after the date of the last Provisional Acceptance Certificate stipulated in Article 19.3 ‘Provisional Acceptance Certificate’ of SUBCONTRACT GENERAL TERMS & CONDITIONS.

The other one must be valid from the Effective Date of LORAC SUBCONTRACT until thirty (30) days after the date of the Final Acceptance Certificate stipulated in Article 21 ‘Final Acceptance” of SUBCONTRACT”.

[Emphasis in original]

The surety bonds

  1. There are eight bonds relevant to these proceedings, which have a total value of AUD$49,415,052.00. They may be organised into the following three categories:

  1. four bonds to cover 10 per cent of the portion of the JKC Subcontract Price that related to the LORAC Allocated Scope of Works (the Allocated Work Bonds):
  1. Bond No. 201205-0079 (AUD$14,507,781.00), which expires, inter alia, 30 days after the date of the Provisional Acceptance Certificate;
  2. Bond No. 201205-0080 – (AUD$14,507,781.00), which expires, inter alia, 30 days after the date of the Final Acceptance Certificate;
  3. “Top up” Bond No. SL002/102 (AUD$2,302,841.00), which expires, inter alia, 30 days after the date of the Final Acceptance Certificate; and
  4. “Top Up” Bond No. SL002/103 (AUD$2,302,841.00), which expires, inter alia, 30 days after the date of the Final Acceptance Certificate;
  1. two bonds to cover 10 per cent of the price of the LORAC Subcontract works (the LORAC Subcontract Work Bonds):
  1. Bond No. 201205-0081 (AUD$6,317,523.00), which expires, inter alia, 30 days after the date of the Provisional Acceptance Certificate; and
  2. Bond No. 201205-0082 (AUD$6,317,523.00), which expires, inter alia, 30 days after the date of the Final Acceptance Certificate.
  1. two bonds to cover the portion of the Advance Payment from JKC that related to the LORAC Subcontract works (the Advance Payment Bonds):
  1. Bond No. 201205-0128 (AUD$1,895,257.00), which expires, inter alia, when the full amount of the advance payment has been repaid by Laing O’Rourke; and
  2. Bond No. 201205-0129 (AUD$1,263,505.00) which expires, inter alia, when the full amount of the advance payment has been repaid by Laing O’Rourke.
  1. In addition, bonds were issued to cover the portion of the Advance Payment from JKC that related to the LORAC Allocated Scope of Works. However, these have been returned.
  2. The parties agreed that the Allocated Work Bonds were provided under sub-clause 14(e)(i) of the Consortium Agreement. However, they disagreed as to the basis for the other bonds. Laing O’Rourke submitted that the LORAC Subcontract Work Bonds were also provided under sub-clause 14(e)(i) and the Advance Payment Bonds under sub-clause 14(e)(ii). Kawasaki submitted that the LORAC Subcontract Work Bonds were provided under sub-Article 6.1 and the Advance Payment Bonds under Article 6.2 of the Special Terms and Conditions to the LORAC Subcontract.

The dispute between Kawasaki and Laing O’Rourke

  1. There have been significant delays in the completion of the cryogenic tanks project in Darwin. The time for performance of the JKC Subcontract has long passed. Kawasaki and Laing O’Rourke have fallen out and each has identified claims against the other asserting responsibility for the failure of the project.
  2. On 31 January 2017, JKC asserted an entitlement to damages from Laing O’Rourke and Kawasaki in excess of AUD$102 million. Despite that claim, JKC has not called on the Kawasaki Bonds.
  3. Laing O’Rourke has stopped work on the project site. Kawasaki says it is trying to complete all of the work under the JKC Subcontract. It was asserted by Kawasaki at the hearing that the bonds identified above at paragraph [19] in (1)(a) and (2)(a), being those referable to the Provisional Acceptance Certificate, will likely expire at the end of 2017 and those identified in (1)(b), (c), (d) and (2)(b) referable to the Final Acceptance Certificate, will likely expire at the beginning of 2018.
  4. On 14 March 2017, Kawasaki issued notices of call to the financial institutions that had issued the surety bonds at the request of Laing O’Rourke under clause 14(e) of the Consortium Agreement and Article 6 of the LORAC Subcontract. Notice of the calls was not given to Laing O’Rourke. The quantum of the eight surety bonds remaining as the subject of this dispute is AUD$49,415,052.00 (see [19] above).
  5. On 15 March 2017, Kawasaki gave notice to Laing O’Rourke that it purported to terminate the Consortium Agreement and the LORAC Subcontract.
  6. Later on 15 March 2017, Laing O’Rourke commenced proceedings in the NSW Supreme Court seeking an interlocutory injunction to restrain Kawasaki from calling on the surety bonds without the consent of Laing O’Rourke or an order of the arbitral tribunal constituted under the ICC Rules as contemplated by clause 19 of the Consortium Agreement. The originating process sought an order under s 7(2) of the International Arbitration Act 1974 (Cth) that “so much of these proceedings as involves the determination of a claim for final relief is stayed”.
  7. On 15 March 2017, upon the giving of the usual undertaking as to damages by Laing O’Rourke, Ball J granted Laing O’Rourke an ex parte injunction preventing Kawasaki from calling on the bonds. Later the same day, Kawasaki informed Laing O’Rourke that it already had made a call on the surety bonds. Ball J thereupon made further ex parte orders requiring Kawasaki to withdraw the call. Later that day, Kawasaki withdrew the call on the bonds.
  8. On 4 April 2017, Laing O’Rourke gave written notice to Kawasaki of a dispute within the meaning of clause 19 of the Consortium Agreement (see [11] above) about Kawasaki’s right to call on the “surety bonds” and gave notice that if the matter was not resolved within 20 days, Laing O’Rourke would refer the matter for international arbitration pursuant to that clause.

Decision of the primary judge

  1. On 13 and 28 April 2017, the primary judge heard Kawasaki’s application to discharge the interlocutory injunction granted by Ball J. It is important to note at the outset that both parties invited the primary judge to consider the question before him on a “serious question to be tried” basis, and not on a final or “as if final” basis.
  2. Before the primary judge, Kawasaki submitted that there was not a serious question to be decided as to whether clause 14 fettered its entitlement to call on the bonds. In support of that position, it principally relied on the following statement in the decision of the Full Court of the Federal Court (French, Jacobson and Graham JJ) in Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd [2008] FCAFC 136; 249 ALR 458 at [83]:

“[83] Clear words will be required to support a construction which inhibits a beneficiary from calling on a performance guarantee where a breach is alleged in good faith, that is, non-fraudulently.”

  1. Rejecting that submission, the primary judge concluded:
  1. that the Full Court’s observations were directed to contracts under which a condition precedent to a call on the performance bond by the beneficiary was breach of the contract by the party that established the bond: [35];
  2. that the unconditional nature of the bonds is merely one factor to be considered when looking at all of the relevant circumstances, and does not give rise to a requirement of “clear words” or a presumption in favour of a construction permitting recourse to the bonds by Kawasaki: [39]; and
  3. that the question of construction is to be determined “in the usual way” by reference to the familiar principles of construction stated by the High Court in Simic v NSW Land and Housing Corporation [2016] HCA 47; (2016) 91 ALJR 108 at [78]: [40].
  1. His Honour also noted that the correctness of the decision in Clough had been doubted by Macfarlan JA (with whom Campbell JA agreed) in this Court in Lucas Stewart Pty Ltd v Hemmes Hermitage Pty Ltd [2010] NSWCA 283 at [37]-[43]: [34].
  2. In relation to the contractual basis for the LORAC Subcontract Work Bonds and the Advance Payment Bonds, the primary judge held that all are governed by clause 14 of the Consortium Agreement: [48]. His Honour also concluded from the language of Article 6 of the Special Terms and Conditions that it was intended to confirm and, to a limited extent, supplement clause 14 of the Consortium Agreement; it did not modify or expand the circumstances in which Kawasaki could call the surety bonds: [57].
  3. Whilst noting that clause 14 does not state those circumstances expressly, the primary judge held that its provisions suggest “very strongly” that it was the intention of the parties that Kawasaki could only call on the surety bonds if a call had been made on it by JKC under the Kawasaki Bonds: [60]. After examining the proper construction of clause 14 at [61]-[75], his Honour concluded that there was a serious question to be tried as to whether clause 14 should be construed as making Kawasaki’s entitlement to call on the surety bonds conditional upon JKC first calling on the Kawasaki Bonds – that is, that they are to be seen as “back to back” bonds: [82].
  4. As JKC had not called on the Kawasaki Bonds, his Honour held that he “would go further” than to say there is a serious question to be tried as to whether Kawasaki is entitled to call on the surety bonds, and say that “it is strongly arguable that [Kawasaki] is not” entitled to do so: [83]-[85].
  5. The primary judge gave six reasons for his conclusion that the balance of convenience favoured the continuation of the injunction granted by Ball J:
  1. the “better view” is that Kawasaki is not at the moment entitled to call on the surety bonds: [87];
  2. Kawasaki did not point to any substantial prejudice to it if the existing restraint is continued: [88];
  3. no arbitral tribunal has yet been established to deal with the underlying dispute. Laing O’Rourke could not at this time approach the arbitral tribunal to seek an order restraining Kawasaki from calling on the bonds. A dissolution of the injunction in these circumstances would see Laing O’Rourke “forever lose” the right to restrain a call on the surety bonds: [89];
  4. it appears likely that Laing O’Rourke may suffer significant prejudice if Kawasaki calls on the surety bonds in circumstances where it would be very difficult for Laing O’Rourke to prove, in monetary terms, what damage it has suffered; thus, damages may not be an adequate remedy in the circumstances: [90];
  5. specifically, there was evidence to suggest that if Kawasaki was able to call on the surety bonds this might place Laing O’Rourke, or a related company, in breach of minimum cash requirements under a number of finance facilities: [93]; and
  6. also, there is the possibility of reputational damage to Laing O’Rourke in the industry in which it operates if it became known that a performance bond has been called upon: [94].
  1. On 5 May 2017, the primary judge declined to discharge the interlocutory injunction. The orders made were:

“1. Orders made in chambers accordance with the Short Minutes of Order, initialled by Stevenson J, dated today and placed with the papers.

2. Stand the matter over for directions before me at 9.30am on 9 May 2017.

SHORT MINUTES OF ORDER

1 Upon the Plaintiff by its counsel giving the usual undertaking as to damages, ORDER that, until the further order of this Court and subject to any order to the contrary by the Arbitral Tribunal, the Defendant is restrained from calling upon the following surety bonds or any of them without the consent of the Plaintiff:

a. 201209-0070 dated 4 June 2012 issued by Swiss Re International SE;

b. 201209-0080 dated 4 June 2012 issued by Swiss Re International SE;

c. 201209-0081 dated 4 June 2012 issued by Swiss Re International SE;

d. 201209-0082 dated 4 June 2012 issued by Swiss Re International SE;

e. 201209-0128 dated 4 June 2012 issued by Swiss Re International SE;

f. 201209-0129 dated 4 June 2012 issued by Swiss Re International SE;

g. SL0002/102 dated 9 December 2016 issued by CGU Insurance Limited; and

h. SL0002/103 dated 9 December 2016 issued by CGU Insurance Limited.

2 ORDER the Defendant to pay the Plaintiff’s costs of and incidental to paragraph 1 of the Plaintiff’s summons filed 15 March 2017.

In these orders,

“Arbitral Tribunal” means an arbitral tribunal appointed as contemplated by clause 19 of the Consortium Agreement.

“Consortium Agreement” means the document entitled ‘Ichthys Onshore TNK-1 EPC Cryogenic Tanks Consortium Agreement” dated 26 April 2012 and signed by the parties.

This matter is listed for Directions on 9 May 2017 9:30 AM before the Supreme Court – Civil at Supreme Court Sydney.”

Issues on appeal

  1. By its amended notice of appeal, Kawasaki advanced the following grounds:

  1. the primary judge erred in failing to conclude that clear words were required to support a construction which inhibited or prevented Kawasaki from calling upon the bonds (Ground 1);
  2. the primary judge erred by not taking into account the contractually required terms of the bond in construing the contracts for the purpose of determining whether those contracts inhibited or prevent Kawasaki from calling upon the bonds (Ground 2);
  3. the primary judge ought to have held that there were no clear words in the contracts between the parties to support a construction which inhibited or prevented Kawasaki from calling upon the bonds (Ground 3);
  4. in the alternative to Grounds 1 – 3, the primary judge should have held that on a proper construction of the contracts, Kawasaki was not inhibited or prevented from calling upon the bonds (Ground 4);
  5. the primary judge should have reached the conclusion in Ground 3 or Ground 4 on either premise (that the contractually required terms of the bonds formed part of the terms of the contract or they did not form part of the contract) (Ground 5);
  6. the primary judge ought to have determined, on a final basis, the proper construction of the contracts in relation to the right to call upon the bonds (Ground 6); and
  7. the primary judge miscarried in exercising his discretion in determining where the balance of convenience lay because (Ground 7):
  1. the primary judge did not take into account the prejudice to Kawasaki if the interlocutory injunction were granted, namely, that there was a risk that the bonds would expire before final determination of the underlying dispute between the parties and therefore erred in concluding that there would be no substantial prejudice to Kawasaki if the existing restraint continued;
  2. in the case of the Purchase Order, the primary judge failed to take into account Laing O’Rourke’s agreement to waive any right that it may have to obtain an injunction or other remedy or right against Kawasaki in respect of Kawasaki having recourse to the bonds;
  3. the primary judge erred in concluding that it appears likely that Laing O’Rourke may suffer significant prejudice if Kawasaki calls on the bonds;
  4. the primary judge ought to have concluded that, in providing the bonds, Laing O’Rourke assumed the risk that Kawasaki could have recourse to the bonds pending final determination of the dispute;
  5. there was no finding or evidence that Laing O’Rourke would suffer prejudice if some, but not all, of the bonds were called upon;
  6. the primary judge incorrectly concluded that Laing O’Rourke could not seek the interlocutory orders sought from an arbitral tribunal, and incorrectly took that conclusion into account as a factor weighing in favour of Laing O’Rourke on the question of balance of convenience; and
  7. the primary judge erred in finding or inferring that if the bonds were called upon there was a possibility of reputational harm to Laing O’Rourke.

Leave to appeal

  1. Because the primary judge’s decision was interlocutory, Kawasaki requires leave to appeal under s 101(e) of the Supreme Court Act 1970 (NSW).
  2. In our view, the issues raised are of sufficient public importance to warrant a grant of leave to appeal.

Grounds of appeal 1 – 5

  1. The parties approached grounds 1 – 5 as involving similar and overlapping issues. It is convenient to deal with those issues together.

Appellant’s submissions

  1. Kawasaki submitted that the weight of authority in Australia was to the effect that a court will prevent a party who is the beneficiary of performance bonds from calling on a bond in very limited circumstances. Specifically, it contended that the primary judge erred in not applying the statement of principle in Clough at [83], extracted at [31] above. That principle was said to be binding on this Court absent a finding that it is “plainly wrong”.
  2. Kawasaki submitted that bonds such as those in these proceedings are “the life-blood of international commerce”, and accordingly that it is sensible that “clear words” are required to prevent a party from having recourse to them. In this respect, it also relied on the following statement of Gageler, Nettle and Gordon JJ in Simic at [88]:

“[88] Under the latter form of security, the issuer (here, ANZ) is not required or intended to be concerned with the terms of the underlying contract (here, the Construction Contract) or, subsequently, with whether the construction contractor (here, Nebax) has sufficiently performed its obligations under that contract. The issuer’s sole concern is to provide security in accordance with its contract with its customer (here, Nebax) and, when the security is issued, to see whether there has occurred the event stipulated in the instrument on which the issuer’s obligation to pay arises. In effect, such securities “create a type of currency” and are treated as being “as good as cash”. Instruments of this nature are essential to international commerce and, in the absence of fraud, should be allowed to be honoured free from interference by the courts.”

  1. In order to “be as good as cash”, Kawasaki submitted, the surety bonds must be able to be called as and when the person who holds them seeks to have the cash, subject only to a good faith restriction. Any restriction on the right to call absent the clear words required by the Full Federal Court in Clough was said to deprive the bonds of their intended cash-like quality.
  2. Kawasaki also submitted that neither the Consortium Agreement nor the LORAC Subcontract contain a negative stipulation preventing it from calling on the bonds, let alone “clear words” to that effect. In support of this, it submitted that “[i]t’s not enough just to focus on paragraphs (a), (b) and (c) of clause 14”, which instead needed to be viewed side by side with the terms of the bonds themselves.
  3. Kawasaki submitted that sub-clauses 14(a), (b) and (c) of the Consortium Agreement regulate the parties’ rights and obligations in the event of JKC making a call on the Kawasaki Bonds in relation to an alleged breach of their joint and several obligations to JKC. In that event, it accepted that sub-clause 14(c) would prevent it from calling on the surety bonds until the mechanisms provided for by Articles 6, 8 and 19 were undertaken to determine who was liable to pay and in what amount. Where JKC had not made such a call (as in the present case), those sub-clauses were said to be irrelevant.
  4. Accordingly, Kawasaki contended that clause 14 addresses two subjects: sub-clauses 14(a), (b) and (c) concern the rights and obligations of the parties with respect to the Kawasaki Bonds provided to JKC; and sub-clauses 14(d), (e), (f) and (g) concern a separate matter, namely the surety bonds provided by Laing O’Rourke to Kawasaki. In relation to the former, the parties agreed that, in the event of a call by JKC, Kawasaki would initially bear responsibility for meeting that call (absent contrary agreement). However, in relation to the latter, Laing O’Rourke was obliged to meet a call made by Kawasaki without recourse to the elaborate dispute resolution mechanism the parties had agreed. It was submitted that, other than a possible connection via sub-clause 14(c) in a case where JKC had made a call on the Kawasaki Bonds, the bonds were otherwise addressing and securing different subject matters.
  5. As to the LORAC Subcontract Work Bonds and Advance Payment Bonds (see [19]-[21] above), Kawasaki’s principal submission was that those bonds were issued under Article 6 of the LORAC Subcontract and that the JKC Subcontract and clause 14 of the Consortium Agreement were irrelevant. In the alternative, Kawasaki submitted that, if clause 14 and the JKC Subcontract were relevant to the determination of the parties’ rights and liabilities under the LORAC Subcontract, the effect of sub-Article 35.3(b) of the JKC Subcontract was that Laing O’Rourke had promised not to seek interlocutory relief in relation to the surety bonds. That sub-Article provides:

“(b)   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).”

  1. It was submitted that this provision and sub-clause 14(c) of the Consortium Agreement are not inconsistent because they deal with different subject matters. Kawasaki accepted, if both sub-Article 35.3(b) and sub-clause 14(c) are engaged and there is an inconsistency between them, that clause 14 would prevail.

Respondent’s submissions

  1. Laing O’Rourke submitted that there is no special rule of construction for contracts involving surety bonds to the effect that “clear words” are required before a contract will be construed as prohibiting a call upon the bonds in certain circumstances or absent the satisfaction of some condition. The contrary position was said to arise from a “misreading” of Clough.
  2. It was submitted that nothing in Clough would prevent this Court from upholding the construction that it advances:

“…properly understood, the reasoning in Clough serves to confirm that the task for a court considering an application to restrain an apprehended call on a performance guarantee is to ‘constru[e] the terms of the contract’ in the ordinary way. Where – on the proper construction of the parties’ contract – there is an agreed allocation of risk as to who is to be out of pocket pending resolution of the dispute about breach”, the court should not favour a construction which is inconsistent with [that] agreed allocation of risk absent clear words requiring such a course.”

  1. Further, Laing O’Rourke submitted that these proceedings involve a different question from that in Clough. In Clough, the court was required to consider the question whether the contract there under consideration should be construed as prohibiting a surety bond being called upon in the absence of an objective non-compliance with the contract or whether it was sufficient for the party making the call to allege in good faith a non-compliance with that contract. Here, this Court is considering a quite different question: namely, whether the Consortium Agreement should be construed as prohibiting the surety bonds from being called in the absence of a call by JKC on the Kawasaki Bonds under the JKC Subcontract.
  2. In the alternative, the respondent submitted that, if this Court accepted Kawasaki’s submission that Clough is to be read as creating a special rule of construction applicable to contracts for the provision of surety bonds, it should not be followed on the basis that it would be inconsistent with the authorities. Specifically, the respondent relied on the consideration of the authorities conducted by White J (as his Honour then was) in Universal Publishers v Australian Executor Trustees [2013] NSWSC 2021 at [28]-[58]. It submitted that his Honour correctly concluded in that case at [58]:

“In my view, the decision in Lucas Stuart Pty Limited v Hemmes Hermitage Pty Limited is inconsistent with the suggestion that Clough Engineering lays down principles applicable to all contracts that where an unconditional performance bond, or a like instrument, is provided as security for a party’s obligations, express words will be needed to preclude a beneficiary of such security from calling on it if a breach is alleged in good faith.”

  1. The respondent also submitted that any such special rule of construction would be contrary to the reasoning of the High Court in Simic (per Gageler, Nettle and Gordon JJ at [77]-[78]).
  2. It was said that this Court should construe the relevant provisions in this case, as did the West Australian Court of Appeal in CPB Contractors v JKC Australia (No 3) [2017] WASCA 132, on the basis that there is no special rule of contractual construction in relation to performance bonds.
  3. Alternatively, Laing O’Rourke submitted that, even if this Court did find that Clough created such a special rule, it should prefer the “better” construction that the primary judge found. That is said to be sufficient to give rise to a serious question to be tried – namely whether Kawasaki is not entitled to call on the surety bonds in the absence of a call by JKC on the Kawasaki Bonds – that warrants the interlocutory relief granted by the primary judge.

Consideration of grounds 1 – 5

Preliminary observations

  1. The Consortium Agreement, as Senior Counsel for Kawasaki observed, is a “rather unusual agreement”. The parties have devised their own prescriptive internal dispute resolution mechanism in Articles 6, 8, 14 and 19 of the Consortium Agreement. The question is whether that agreement, in describing the parties’ obligations with respect to the provision of the surety bonds, supports the grant of an interlocutory injunction pending determination of a dispute between Kawasaki and Laing O’Rourke by international arbitration in a forum agreed by the parties.
  2. Much of the debate on the appeal started from the premise advanced by Kawasaki that a performance bond, by its very nature, is a “risk allocation device”. That description expresses a conclusion after a process of construction has been worked through and does not, of itself, provide any real assistance in addressing the question here. The answer to that question requires a consideration of the rights and obligations of the parties under the JKC Subcontract, the Consortium Agreement, the LORAC Subcontract and the performance bonds themselves.

Clough and a suggested special rule of construction

  1. Clough does not stand for the proposition that there is a special rule of construction relating to all contracts in which there is a reference to a performance bond.
  2. At [82]-[83] of Clough, the Full Federal Court 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 in the passage quoted above, 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.

[83]   It follows that clear words will be required to support a construction which inhibits a beneficiary from calling on a performance guarantee where a breach is alleged in good faith, ie, non-fraudulently. This view is also supported by the remarks of Charles JA in Fletcher Construction [1998] 3 VR at 820-821. There, his Honour analysed and placed some doubt upon the correctness of decisions such as Pearson Bridge (NSW) Pty Ltd v State Rail Authority of New South Wales (1982) 1 Australian Construction Law Reports 81 at 86.”

  1. The first sentence of paragraph [83], in the context of the sentence which immediately preceded it at the end of [82], makes clear that what is said in [83] applies when, on the correct construction of the contract between the parties, it may be concluded that there is “an agreed allocation of risk as to who is to be out of pocket pending resolution of the dispute about breach”.
  2. This understanding of Clough is consistent with the judgment of Macfarlan JA in Lucas Stewart Pty at [37]-[43] and the decision of White J in Universal Publishers at [58]-[61], in passages with which we agree. It is also consistent with the decision of the West Australian Court of Appeal in CPB Contractors v JKC Australia (No 3) at [87]-[89]:

“[87] A number of cases have suggested that the widespread commercial practice that performance bonds are treated as the equivalent of cash is a significant factor in construing a provision of a construction contract regulating recourse to a performance bond. Some cases appear to start from a presumption arising from the nature of a performance bond that the beneficiary has an unfettered right to call upon the bond, and frame the question of construction in terms of whether the provisions of the contract qualify the right to call upon the performance bond. Some of what was said on this topic in Clough Engineering has been doubted in two recent appellate decisions. In these recent cases it has been suggested that the unconditional nature of the financial institution’s promise to pay the principal has ‘limited relevance’ to the construction of the underlying contract and could be seen as serving merely the purpose of protecting the principal from the risk of the contractor’s insolvency.

[88] Counsel for the subcontractor submits that this appeal raises an important point of general principle arising from this difference of approach. That is not how we view this appeal. While we accept that some differences of view have emerged in recent appellate decisions, in our view the resolution of this appeal lies in the proper construction of the provisions of the Subcontract, rather than in attempting to state general principles of broad application or in reconsidering the questions of construction of the different contractual provisions in the other decisions.

[89] The subcontractor rightly accepts that when, as here, the Subcontract annexes and approves the form of the performance bond, in construing the terms of the Subcontract, the unconditional nature of the performance bond, and its terms generally, can be taken into account. That is an application of the basic principle that in construing a term of a contract, regard must be had to the terms of the contract as a whole. However, the terms of the performance bond do not control the question of construction of the Subcontract. The significance of the terms of the performance bond in the process of construction of the underlying contract will fall to be assessed in the light of all of the particular terms of the underlying contract.” (footnotes omitted)

  1. Any suggestion that Clough stands for a broader proposition that there is a special rule of construction relating to all contracts in which there is a reference to a performance bond would be inconsistent with the decision of the High Court in Simic at [78], where the construction of various performance bonds themselves was addressed:

“[78] There was also no dispute about those principles of construction. The proper construction of each Undertaking is to be determined objectively by reference to its text, context and purpose. As was stated in Electricity Generation Corporation v Woodside Energy Ltd at [35]:

[T]he objective approach [is] to be adopted in determining the rights and liabilities of parties to a contract. The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean… [I]t will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding ‘of the genesis of the transaction, the background, the context [and] the market in which the parties are operating’. As Arden LJ observed in Re Golden Key Ltd [[2009] EWCA Civ 636 at [28]], unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption ‘that the parties…intended to produce a commercial result’. A commercial contract is to be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience’.” (footnotes omitted).

  1. The fact that the undertakings in Simic were addressed by the High Court using the same rules of construction as govern commercial contracts stands against Kawasaki’s submission that Clough establishes a separate rule of construction about contracts which provide for the issue of performance bonds.
  2. We do not consider that these conclusions are inconsistent with the observations of Nettle ACJ in CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [2017] HCA Trans 147 to which Kawasaki referred. His Honour expressed no concluded view as to whether Macfarlan JA’s view in Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd at [43] was inconsistent with the weight of authority. We accept that the terms of the bonds in this case are relevant to the construction of the Consortium Agreement and the LORAC Subcontract.
  3. That is not to deny that the typical language of a performance bond may be a powerful reason for concluding that the underlying contract between the parties should have the consequence that the bond is to operate as a “risk allocation device”. In every case, however, that description must be justified by an orthodox process of construction of the relevant language.

Construction of clause 14 of the Consortium Agreement

  1. Kawasaki’s submission that the surety bonds are a “risk allocation mechanism” assumes the answer to the crucial question of construction. The ultimate issue raised by grounds 1 – 5 is whether, at least at the level of a serious question to be tried, Kawasaki is or is not entitled to call on the bonds issued at the request of Laing O’Rourke in circumstances where JKC has not called on the corresponding bonds issued for its benefit at the request of Kawasaki. That in turn depends upon the obligation or liability of Laing O’Rourke intended to be secured by the surety bonds and whether, by reason of the nature of that obligation or liability or the terms of the parties’ agreement, Kawasaki’s entitlement to call on the bonds is necessarily qualified or subject to the satisfaction of any condition. As the authorities, including most recently Simic make clear, a bona fide claim to breach of that obligation or engagement of that liability (whatever it is) will permit Kawasaki to make a call on the surety bonds. Accordingly, Kawasaki’s submission that the surety bonds are a “risk allocation mechanism” assumes the answer to the crucial question of construction – namely, the identification of the “risk” against which the bonds are intended to protect Kawasaki.
  2. That issue resolves to whether, as Kawasaki submitted, the bonds secure performance of Laing O’Rourke’s contractual obligations in relation to the LORAC Allocated Scope of Work, the LORAC Subcontract works and the Advance Payment, or whether, as Laing O’Rourke submitted, the surety bonds secure Laing O’Rourke’s obligation to reimburse Kawasaki for part of the liability arising from a call by JKC on the Kawasaki Bonds. The amount of that reimbursement would be determined in accordance with Articles 6, 8, 13.4 and 14 of the Consortium Agreement, by which the parties distributed the ultimate incidence of a call by JKC on the Kawasaki Bonds (see [73]–[75] below).
  3. In relation to the Allocated Work Bonds, Kawasaki emphasised the provision in sub-clause 14(e)(i) that they were “for securing Laing O’Rourke’s due performance of its obligations under the [JKC] Subcontract” [emphasis added]. Kawasaki submitted that those words identified the intention of the parties as being that Kawasaki would be entitled to call on the surety bonds if Laing O’Rourke was (at least arguably) in breach of any of its obligations to Kawasaki under the Consortium Agreement (and not only if JKC had made a call on the Kawasaki Bonds). Laing O’Rourke retorted that there was no corresponding promise from Kawasaki to Laing O’Rourke to secure its obligations to Laing O’Rourke under the Consortium Agreement.
  4. However, sub-clause 14(e)(i) must be understood in the context of clause 14 as a whole. That sub-clause provides that Laing O’Rourke must procure “surety bonds” to Kawasaki in the amount of 10 per cent of the value of the relevant portion of the JKC Subcontract price which relates to LORAC’s Allocated Scope of Work and the LORAC Subcontract works “for securing Laing O’Rourke’s due performance of its obligations under the Subcontract”. In the context of the clause, the preposition “for” is capable of describing either the function of the Allocated Work Bonds or the occasion in response to which they were provided. If the former, the bonds would be provided to secure LORAC’s performance of its obligations to JKC. If the latter, they would be provided in consideration of Kawasaki having secured Laing O’Rourke’s joint and several obligation to JKC, in part by providing bank guarantees.
  5. At least at the level of a serious question to be tried, this ambiguity is resolved by consideration of the parallel phrasing in sub-clause 14(e)(ii), which requires the JKC Advance Payment Bonds to be provided “for securing payment to Laing O’Rourke of its portion of the Advance Payment in accordance with the Subcontract” [emphasis added]. That language fixes on the benefit to Laing O’Rourke flowing from Kawasaki’s provision of the Kawasaki Bonds, namely Laing O’Rourke’s receipt of its portion of the Advance Payment. There is a serious question to be tried that “securing” is used in sub-clause 14(e)(ii) as a synonym for “procuring”. Such a comparison serves to confirm the sense of “for” in sub-clause 14(e)(i) contended for by Laing O’Rourke. At least as a serious question to be tried, this favours Laing O’Rourke’s position in relation to the Allocated Work Bonds. It does so because it indicates that Laing O’Rourke is to procure the issue of the Allocated Work Bonds to Kawasaki as the provider of the Kawasaki Bonds, and in return for its doing so. The alternative construction would require reading the words in clause 14(e)(ii) “… securing payment to Laing O’Rourke of its portion of the Advance Payment” as meaning “securing payment by Laing O’Rourke of its portion of the Advance Payment”.
  6. The former construction is consistent with a coherent operation of clause 14. In substance, on this construction, the provision of bonds under sub-clause 14(e) secures Laing O’Rourke’s obligation, following a demand made by Kawasaki under sub-clause 14(b), to contribute to liability resulting from a call on the security provided to JKC, the issue of which had been procured by Kawasaki under sub-clause 14(a).

  7. If JKC makes a call on the Kawasaki bonds, sub-clause 14(b) provides that each of Kawasaki and Laing O’Rourke must contribute to the call “in proportion to their liability”, as between themselves, under the Consortium Agreement. In this way, sub-clause 14(b) gives effect to the agreed position in the Consortium Agreement as to the ultimate allocation of responsibility in Articles 6, 8 and 13.4.
  8. That mechanism for repayment on demand is qualified by sub-clause 14(c), which defers recovery until a determination by the Steering Committee where “it is not possible to determine at the date of such call which party is liable for the event which led to the call”. Laing O’Rourke and Kawasaki have equal representation on the Steering Committee. Sub-clause 10.3(d) provides that, if there is a deadlock on the Steering Committee, the matter is to be dealt with under the “Dispute Resolution” provisions of the Consortium Agreement (at clause 19); that is, in effect, by arbitration. Thus, the parties agreed that if it was “not possible to determine” which of Kawasaki and Laing O’Rourke was, in effect, responsible for the event that led to the call by JKC on the Kawasaki Bonds, the dispute would be referred to arbitration. The fact that the parties agreed, pending a determination by the Steering Committee, that the burden of any call by JKC would be “borne” by Kawasaki tends in favour of Laing O’Rourke’s construction of clause 14 read as a whole.

  9. Kawasaki’s submission that clause 14 is to be understood as providing that the parties contracted on “two different bases” should be rejected, at least at the level of serious question to be tried. An important starting point towards that conclusion is that the parties chose to address those bonds in the same clause of the Consortium Agreement as the Kawasaki Bonds. That clause is structured to address, in order, Kawasaki’s obligation to provide the Security, the parties’ obligations to contribute to any call that is made, what is to happen until that ultimate liability is determined, and then the provision of security by Laing O’Rourke for that liability. The text of clause 14 also contains the following indications which support the construction urged by Laing O’Rourke:
  1. where JKC has made a call on the Kawasaki Bonds, Kawasaki cannot call upon the surety bonds until the elaborate internal dispute resolution procedures in the Consortium Agreement have been exhausted (sub-clause 14(c));
  2. the surety bonds provided to Kawasaki must be provided “at the same time” that Kawasaki was obliged to provide JKC with the Kawasaki bonds (sub-clause 14(f));
  3. unless otherwise agreed, those surety bonds must be “for the same duration” as the Kawasaki bonds (sub-clause 14(g));
  4. Kawasaki is required to provide Laing O’Rourke with immediate notice of any call made on it by JKC under the Kawasaki Bonds (sub-clause 14(g)); and
  5. Laing O’Rourke is to bear the incidental costs and obligations associated with the issue of those bonds, just as under sub-clause 14(a) Kawasaki bears the equivalent costs for the Kawasaki Bonds.
  1. But perhaps the strongest indication in the text in favour of Laing O’Rourke’s construction is that sub-paragraph (g) provides that the surety bonds “must be released” by Kawasaki at the same time as the Kawasaki Bonds are released by JKC, irrespective of whether any obligation of Laing O’Rourke to JKC or to Kawasaki remains unperformed.
  2. Kawasaki is correct that the terms of the performance bonds themselves are to be taken into account when considering the obligations of the parties. In this case, the terms of the performance bonds are unequivocal in relation to the issuing bank’s obligation. They are neutral as to the circumstances in which the beneficiary may make a demand upon the bank for repayment.
  3. For these reasons, we are not persuaded that the primary judge erred at the level of a serious question to be tried. Clause 14 of the Consortium Agreement points to the parties’ having intended that surety bonds be security for Kawasaki’s liabilities or obligations as the party having procured the Kawasaki Bonds. That potential liability is only engaged upon JKC making a call upon those bonds.

The LORAC Subcontract

  1. As already noted (see [21] above), there is a question as to whether the same or a different analysis applies to the LORAC Subcontract Work Bonds and the Advanced Payment Bonds, which Kawasaki contends were provided under Article 6 of the Special Terms and Conditions to the LORAC Subcontract.
  2. Some textual support for Laing O’Rourke’s construction is found in Article 6, which refers to surety bonds “for” the bonds issued on behalf of Kawasaki to JKC. This language is consistent with the bonds being security for LORAC’s obligation to contribute in the event of a call on the Kawasaki Bonds.
  3. Article 6.1 requires the LORAC Advance Payment Bond to be valid until the full amount of the Advance Payment has been repaid. There is a question as to whether the “Advance Payment” refers to the advance from JKC to the consortium under the JKC Subcontract, the benefit of which is transferred by Kawasaki to Laing O’Rourke, or whether it refers to a separate advance from Kawasaki to Laing O’Rourke under the LORAC Subcontract. Upon either amount being repaid, the LORAC Advance Payment Bonds would cease to be exercisable as they would either be invalid or incapable of being triggered. The Consortium Advance Payment Bonds would likewise be ineffective after JKC was repaid by reason of sub-clause 14(g) of the Consortium Agreement.
  4. Article 6 recites that the surety bonds are issued “pursuant to” provisions which include clause 14 of the Consortium Agreement. There is a serious question to be tried as to whether Article 6 of the LORAC Subcontract does any more than provide further details of the surety bonds required to be established by Laing O’Rourke under clause 14 of the Consortium Agreement. That it does not is also consistent with the Special Conditions in the Consortium Agreement which contemplate that surety bonds in relation to the LORAC Subcontract will be provided “under clause 14(e)” by Laing O’Rourke “on a preliminary basis” before the Purchase Order and the LORAC Subcontract are finalised.
  5. In these circumstances, there is a serious question to be tried as to whether Article 6 of the LORAC Subcontract was intended to change the circumstances in which the surety bonds might be called on by Kawasaki. The language used is consistent with that it being intended to confirm and, to a limited extent, supplement, clause 14, but not in a way that alters the basis on which those bonds are provided, namely as security for Laing O’Rourke’s liability to contribute in the event of a call on the Kawasaki Bonds.
  6. The reference in Article 6 to Article 35.1 of the General Terms and Conditions of the JKC Subcontract takes the matter no further. Article 35.1 deals principally with formal matters such as the duration of the relevant bank guarantees (and, in particular, provides that the guarantee would be unconditional and irrevocable). Article 35.1 does not deal with the circumstances in which a bank guarantee or bond may be called on by the beneficiary. There is nothing in Article 35 of those General Terms and Conditions that compels a conclusion that the parties intended Kawasaki to be permitted to call upon the surety bonds in broader circumstances than those contemplated by clause 14 of the Consortium Agreement.

Conclusion on grounds 1 – 5

  1. The primary judge did not err in deciding that there was a serious question to be tried as to whether the parties intended that Kawasaki only be entitled to call the surety bonds in circumstances where JKC had first called on the corresponding Kawasaki Bonds.

That the primary judge should have determined the proper construction of the contract “as if on a final basis” ground (ground 6)

Appellant’s submissions

  1. Kawasaki submitted that it is necessary for the Court to determine the proper construction of the relevant contractual provisions as if on a final basis, because to do otherwise would deprive the parties of the commercial bargain they made, as bonds are intended to function as risk allocation devices pending resolution of underlying disputes. In oral address, Kawasaki submitted that:

“…whether the final rights of the parties are to be determined in international arbitration, as in CPB and Clough, or whether at trial, it doesn’t affect this Court’s function, because the Court is required to make a determination of the interlocutory rights of the parties. Those rights, in particular, is who has the money pending final determination. It was certainly open to Laing O’Rourke at least after obtaining the ex parte interlocutory injunction to proceed to arbitration.”

  1. It was also submitted that this course was one adopted by the Victorian Court of Appeal in Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [2015] VSCA 98 and should govern the Court’s exercise of discretion here.

Respondent’s submissions

  1. Laing O’Rourke contended that this Court should not determine the question as to the construction of the contractual arrangements between the parties on a final basis in circumstances where the primary judge had not been asked to do so. It also submitted that the primary judge was not required to determine that question on a final basis because the parties had entrusted the final determination of any disputes between them to international arbitration, by clause 19 of the Consortium Agreement.
  2. Indeed, it submitted that the primary judge could not have determined that question on a final basis. The primary judge was directed by the International Arbitration Act 1974 (Cth) and the UNCITRAL Model Law on International Commercial Arbitration (Model Law) not to “intervene” except where permitted by the Model Law. The practical consequence of this was that the primary judge was able only to issue an “interim measure” in aid of arbitration proceedings or to exercise the court’s ordinary powers to grant interlocutory relief, a right which appears in Article 9 of the Model Law, and clause 19.1 of the Consortium Agreement.
  3. Laing O’Rourke submitted that, in such an application for interlocutory relief, it is a matter for the discretion of the court to decide the extent to which it engages with questions of law in determining whether the balance of convenience supports a grant of interlocutory relief. Reference was made to the High Court’s statement in Cohen v Peko-Wallsend Ltd [1986] HCA 70; (1986) 61 ALJR 57 at 59:

“ … It is not right to say that it is always the duty of the Court on an interlocutory application to decide a question of law upon which the decision of the case depends. No doubt if the question is one susceptible of resolution without further evidence, and the urgency of the matter does not render it impracticable to give proper consideration to the question, the desirable course will be to decide it. Ultimately, however, the course which the Court takes lies within its discretion. …”

  1. Laing O’Rourke submitted that the relief it sought was “deliberately framed” to be of an interlocutory kind to avoid issues with the International Arbitration Act. The nature of the relief was framed so as, in effect, to grant a stay, but without having to grapple with the issue as to whether or not it was strictly an “order”. The form of the order ultimately made was not opposed by Kawasaki.

Consideration of ground 6

  1. The issues before the primary judge were, by reason of clause 14 of the Consortium Agreement and Article 6 of the Special Terms and Conditions to the LORAC Subcontract:
  1. whether there is a serious question to be tried that, on the proper construction of the Consortium Agreement and the LORAC Subcontract, Kawasaki was not entitled to call the surety bonds until JKC had called on the Kawasaki bonds;
  2. whether damages were an adequate remedy; and
  3. whether the balance of convenience favoured making the order.
  1. Despite Kawasaki’s oral submissions to the contrary to this Court, both parties now accept that the primary judge was never asked to determine questions about the construction of the Consortium Agreement on any basis other than whether there was a serious question to be tried. Mr M Christie SC, who appeared for Kawasaki with Ms N Simpson, made that point clear in a letter to the Associate to the Presiding Judge sent on 28 August 2017 (after the hearing of the appeal), sent with the approval of Mr R Dick SC, who appeared with Mr S Robertson for Laing O’Rourke.
  2. Kawasaki now accepts that the primary judge was not asked to determine this case “as if” on a final basis. Having regard to clause 19 of the Consortium Agreement, it was also common ground that the primary judge could not determine the case on a final basis. For that reason, the orders (set out at [38] above) made by the primary judge were by consent.
  3. The passages relied upon by Kawasaki drawn from Sugar at [31], [43]-[46] are distinguishable from the circumstances before this Court where the parties have agreed to submit their dispute to international arbitration. This plainly is not a case where a declaration can be made. Such a declaration of rights would be inconsistent with clause 19 of the Consortium Agreement, which entrusts an arbitral tribunal with the determination of all disputes.
  4. It is also important to note the Victorian Court of Appeal’s statement in Sugar at [67]:

“The primary judge did not decide whether GC 5.2 was intended to allocate risk pending the resolution of a dispute. In our view it was so intended and this in turn constitutes a consideration of fundamental importance in assessing whether the grant of an injunction carries with it the lower risk of injustice.” (italics added)

  1. In Sugar, the Court decided that the relevant clause was intended to allocate risk pending the resolution of the matter in dispute. Sugar is thus distinguishable. It does not follow, in a case where there is a serious question to be tried as to what obligation or liability is secured by a performance bond, that the court should determine that question of construction “as if” on a final basis.
  2. In the context of an agreement under which the parties have agreed to submit their disputes to international arbitration, Kawasaki also relied on Cape Lambert Resources Ltd v MCC Australia Sanjin Mining Pty Ltd [2013] WASCA 66 at [26]-[28], where the Court identified a number of what it said were “significant difficulties” in the interim relief proposed by the primary judge in that case, namely, the power of an arbitrator “to modify any order of this court”, the comity between jurisdictions and the issue of the delegation of federal judicial power. Dealing with the last issue first, it does not arise in this case as the primary judge’s order terminates upon the making of an order by the arbitral tribunal. The Court of Appeal recognised as much in Cape Lambert:

“[28] … this is not to say that a court could not make orders which terminate upon the occurrence of an event, such as the appointment of an arbitrator. Such an order would not involve the delegation of judicial power – rather it would define the extent of its exercise.”

  1. As to the first and second issues, the caution expressed in Cape Lambert Resources Ltd does not apply in the present case. First, it is important to remember that the form of the order made by the primary judge was by consent. There is no question of the arbitrator making any order to modify any order of this Court. It is clear that a court can, as happened here, craft orders that terminate upon an order made by an arbitral tribunal, and Kawasaki consented to orders in that form. Secondly, the comity considerations referred to do not arise here, where the party seeking the injunction has made it clear on the record that they seek only to preserve the position until the dispute can be addressed by the arbitral tribunal. In those circumstances Laing O’Rourke could not be heard to complain that the arbitral tribunal proposed to exercise the power it undoubtedly has to grant interim relief.
  2. As Edelman J explained in Sino Dragon Trading Ltd v Noble Resources International Pty Ltd [2015] FCA 1028; (2015) 246 FCR 479 at [105] in a case such as the present, it is the arbitrators who will be required to determine any final dispute, as the parties agreed:

“[105] Fourthly, and independently of the scope of Article 17J, the power under that article “should be exercised very sparingly and in circumstances in which such orders were effectively the only means by which the position of a party could be protected until an arbitral tribunal was convened”: Cape Lambert Resources Ltd v MCC Australia Sanjin Mining Pty Ltd [2013] WASCA 66; (2013) 298 ALR 666, 694 [96](Martin CJ; Buss JA agreeing) quoting from Cetelem SA v Roust Holdings [2005] ECWA Civ 618; [2005] EWCA Civ 618; [2005] 4 All ER 52.”

  1. In the way the present case was advanced by both parties before the primary judge, his Honour’s conclusion in favour of Laing O’Rourke’s position was sufficiently probable in the circumstances to support an interlocutory injunction: Australian Broadcasting Corporation v O’Neill [2006] HCA 46; (2006) 227 CLR 57; 80 ALJR 1672; 229 ALR 457 at [71]-[72] per Gummow and Hayne JJ. Ground 6 of the notice of appeal is rejected.
  2. Kawasaki does not challenge the primary judge’s finding at [90]-[92] that damages would not be an adequate remedy.

The discretion ground (ground 7)

  1. Kawasaki accepted that it must demonstrate error in the sense of House v R (1936) 55 CLR 499; [1936] HCA 40 to succeed on this ground. Kawasaki advanced seven sub-grounds, which are set out at [39] above. Each alleges that the primary judge’s exercise of discretion to grant the interlocutory relief miscarried.
  2. Kawasaki’s principal submission was that if the existing restraints on calling on the bonds are continued, there is a risk they will expire before an arbitral tribunal determines the underlying dispute between the parties, in which case, Kawasaki will suffer irreparable prejudice, namely, its security will be entirely lost and it will be “out of pocket with the cash”.
  3. Kawasaki submitted that the primary judge failed to take into account, or give sufficient weight to, this possibility. It submitted that the primary judge could not have been satisfied that the final determination of this matter at arbitration would take place before the expiry of the relevant bonds. As such, his Honour is said to have erred in concluding that there would be no substantial prejudice to Kawasaki if the existing restraint was continued.
  4. The submission ultimately advanced by Kawasaki was as follows:

“We simply say that both are very large corporations. This ultimately comes down to who is entitled to have the benefit of the proceeds or the security, pending the final determination of the dispute….”

  1. It was also submitted that it was possible that his Honour “overlooked” the submission made by Kawasaki that there is a risk the surety bonds will expire before the underlying dispute is determined in arbitration, and that this is a significant risk to Kawasaki.
  2. In our view the primary judge did not overlook the risk that the surety bonds might expire before the underlying dispute is determined. His Honour’s conclusion at [75]-[78] made clear that on his preferred construction of the Consortium Agreement, the parties had agreed that Kawasaki bore the risk of expiry of the bonds pending determination of an underlying dispute. That conclusion was responding, in part, to Kawasaki’s claim that the surety bonds may expire prior to the determination of the dispute by an arbitral tribunal. At least where JKC had made a claim on the Kawasaki bonds, sub-clause 14(c) of the Consortium Agreement could have that effect. As the primary judge found at [78]:

“[78] …the parties intended that the bond to be given by Kawasaki pursuant to cl 14(a) (the Kawasaki Bond) and the Laing O’Rourke Bonds be “back to back” bonds; the latter to provide security for Kawasaki’s liability under the former (subject to the regime in cl 14(c)).”

  1. Kawasaki also has the benefit of an undertaking as to damages. As Senior Counsel for Kawasaki accepted, it has the ability to obtain security for that undertaking if there is any apprehended risk of Laing O’Rourke not being in a position to make good that undertaking. Kawasaki has chosen, to date, not to seek security.
  2. It is correct to say that in the events that have transpired there is a risk that the surety bonds will expire prior to the conclusion of any determination by an arbitral tribunal of the dispute between the parties. However, in our view it has not been shown that the primary judge gave this matter insufficient weight in assessing where the balance of convenience lay, and thereby erred in the exercise of his discretion.
  3. Kawasaki next submitted that the primary judge failed to take into account, or gave insufficient weight to, Laing O’Rourke’s agreement to waive any right that it might have to obtain an injunction against Kawasaki in respect of the bonds provided under the LORAC Subcontract.
  4. Kawasaki submitted that the LORAC Subcontract incorporated, by reference in Article 1 of the Purchase Order, sub-Article 35.3(b) of the JKC Subcontract General Terms and Conditions. That sub-Article provides:

“Subcontractor waives any right that it may have to obtain an injunction or any other remedy or right against any part in respect of Contractor having recourse to the Bank Guarantee(s)”.

  1. This submission should be rejected. The primary judge took into account sub-Article 35.3(b) of the JKC Subcontract. In [46]-[48], his Honour said:

“In particular, Mr Christie submitted that the Laing O’Rourke Bonds referred to in Art 6 of the Purchase Order are governed by the General Terms and Conditions of the JKC Subcontract (document “(5)” in the “order of precedence” under the Purchase Order; see [42] above), rather than by cl 14 of the Consortium Agreement.

This is significant, Kawasaki contends, because the JKC General Terms and Conditions contain a “no injunction” clause pursuant to which the “Subcontractor” purports to waive any right to seek an injunction to restrain a call on the performance bond in question. There is no such clause in the Consortium Agreement.

In my opinion, on the proper construction of the Consortium Agreement and the Purchase Order, all of the Laing O’Rourke Bonds are governed by cl 14 of the Consortium Agreement; none are governed the JKC General Terms and Conditions. Thus, I do not accept the submission referred to at [46].”

  1. It has not been shown that the primary judge gave this matter insufficient weight in assessing the balance of convenience, and thereby erred.
  2. Kawasaki next submitted that the primary judge erred by failing to conclude that, in providing the bonds, Laing O’Rourke assumed the risk that Kawasaki could have recourse to the bonds pending final determination of the dispute. Kawasaki relied on the following statement of McMurdo JA in RCR O’Donnell Griffin Pty Ltd v Forge Group Power Pty Ltd (Receivers and Managers Appointed) (in liq) [2016] QCA 214; (2016) 32 BCL 406 at 424 (Applegarth J agreeing):

“…A court hearing an interlocutory injunction would have been alert to the risk that if the Principal was to be enjoined from having recourse to the security, pending resolution of the dispute as to whether it was entitled to do so, the benefit to the Principal of the security could be substantially diminished. In any way, I would endorse the statement by Osborn and Ferguson JJA in Sugar Australia Ltd v Lend Lease Services Pty Ltd that:

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.’ (italics added)

  1. This submission repeats, under the guise of the balance of convenience, the submission addressed above which assumes that the surety bonds are a “risk allocation device”. The statements from Sugar and Forge, extracted above, are each predicated on the bonds in those cases being found to be “intended to operate as a risk allocation device pending the final determination of the dispute between the parties”. The essence of the present dispute is different and is whether the bonds are intended to operate as a risk allocation device before any demand has been made by JKC under the Kawasaki Bonds.
  2. It has not been shown that the primary judge fell into House v R error in failing to conclude that, in providing the surety bonds, Laing O’Rourke assumed the risk that Kawasaki could have recourse to the bonds pending final determination of that dispute.
  3. Kawasaki next submitted that the primary judge failed to take into account, or give sufficient weight to, the fact that Laing O’Rourke would not suffer prejudice if some, but not all, of the bonds were called upon, and therefore the exercise of his Honour’s discretion miscarried. In its written submissions, Kawasaki submitted that:

“Kawasaki’s point is, quite simply, that in circumstances where Laing O’Rourke effectively accepts that a call on $10 million of bonds would not cause prejudice, then the Court would not restrain Kawasaki from calling upon bonds in (at least) that sum. The primary judge did not consider this submission in his reasons or otherwise make a finding that Laing O’Rourke would suffer any prejudice if some (say $10 million), but not all, of the bonds were called upon by Kawasaki.”

  1. It has not been shown that the primary judge erred in failing to conclude that Laing O’Rourke would not suffer prejudice if some, but not all, of the surety bonds were called upon. Kawasaki has at no time sought to call on some only of the bonds. In circumstances where the primary judge was not asked to rule on whether Kawasaki could call on some but not all of the bonds pending final determination of the dispute, his Honour did not fall into House v R error in failing to conclude that something he was not asked to do would not cause prejudice.
  2. Kawasaki next submitted that the primary judge erroneously concluded that Laing O’Rourke could not seek the interlocutory orders sought in the Supreme Court from an arbitral tribunal and took that erroneous conclusion into account in determining that the balance of convenience favoured the granting of the injunction. Kawasaki took issue with the following passage at [89] of the primary judge’s reasons:

“[89] … . Laing O’Rourke thus cannot, at the moment, approach the arbitral tribunal to seek an order from it restraining Kawasaki from calling on the Laing O’Rourke Bonds. If the current restraint is dissolved, Laing O’Rourke will, in substance, forever lose the right to restrain a call on the Laing O’Rourke Bonds.”

  1. Kawasaki submitted that the key question is whether the bonds were intended to operate as risk allocation devices. If they were intended to operate in this way, then “it is the continuation and not the dissolution of the injunction that is finally dispositive of rights, because the consequence of such an order would be that Kawasaki would forever lose its right to call upon the bonds pending the determination of the underlying dispute”.
  2. This issue was considered and rejected. It is based on the premise that the surety bonds were for a “risk allocation purpose”. We agree with the submission by Laing O’Rourke that “it was a matter for the primary judge to decide what weight (if any) to give to the consequences of a construction that his Honour regarded was wrong on “the better view”.
  3. Kawasaki next submitted that there were factors which precluded the primary judge from inferring damage to Laing O’Rourke’s reputation. The primary judge said at [94]:

“[94] … it is not difficult to infer that there would be damage to Laing O’Rourke’s reputation in the industry in which it operates if it became known that a performance bond had been called up, thereby carrying with it market concern about the perceived ability of Laing O’Rourke to perform its obligations under contract. I appreciate that it may be “notorious that disputes are commonly part and parcel of building contracts” (Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [2015] VSCA 98 at [233] (Kaye JA)). However, I find that the possibility of reputational damage weighs, albeit perhaps only slightly, in favour of continuing the restraint.”

  1. Kawasaki relied upon a statement of Kaye JA in Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [2015] VSCA 98; (2015) BCL 407 at [233]. This passage was quoted by the primary judge at [94]. Kawasaki’s complaint should be rejected. No House v R error was committed by the primary judge in determining that “reputational damage weighs, albeit perhaps only slightly, in favour of continuing the restraint”.

Conclusion and orders

  1. For the foregoing reasons, the appeal should be dismissed. The Court makes the following orders:
  1. Leave to appeal granted;
  2. Appeal dismissed;
  3. Appellant pay the respondent’s costs of the application and appeal.