Application to restrain recourse to security

Case Note by David McAndrew

Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [2015] VSCA 98

The Court of Appeal has found that interlocutory applications to restrain recourse to performance bonds generally fall into a special category when it comes to whether the Court should exercise its discretion to decide a question of law/construe the recourse provision. A mere assertion of reputational damage in the event of recourse will not suffice to demonstrate likelihood of irreparable harm.

Threshold issue at first instance

The case concerned an appeal against an interlocutory decision to grant an interlocutory injunction restraining recourse to two bank guarantees totalling $4.2M (approx.).

At first instance, the appellant (the principal) submitted that the primary judge should construe and finally determine the recourse provision which provided that the principal was entitled to have recourse whenever the principal (acting reasonably) may claim to be entitled to payment.

It was submitted on behalf of the principal, that the recourse provision only called up a subjective requirement of a bone fide claim. Alternatively, it submitted that if there was an objective component, it would be entitled to recourse – unless the builder could demonstrate that no reasonable person in the position of the principal could so claim to be entitled at the time when it served the recourse notice.

The respondent (the builder) did not submit to the Court that it should not construe the clause on a final basis, rather it simply joined issue as to its application in the circumstances of the case. The builder alleged in effect that, in circumstances where it had claims exceeding those of the principal and that it had defences to the claims of the principal relied upon for the purposes of having recourse, the principal could not be entitled to have recourse – because it could not be acting reasonably. Essentially the respondent treated the question of whether the principal had acted reasonably as a question of fact.

The Trial Judge declined to construe clause 5.2. In particular he declined to determine whether the commercial purpose was to allocate risk, pending final resolution of disputes and declined to construe the meaning of “acting reasonably”. Rather the Trial Judge found that the construction of the provision raised a serious question to be tried.

The Trial Judge justified his decision to not construe clause 5.2 finally on a number of bases; including the difficulties raised by the construction question, the limited time available to the Court and the availability of the power under r. 47.04 to determine the issue as a separate question prior to trial.

The Court of Appeal

The threshold issue

The Court of Appeal considered that the evident commercial purpose of the security was to allocate risk to the builder, pending final determination of disputes and discussed the main authorities on the topic including: Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812; Clough Engineering Ltd v Oil & Natural Gas Corporation Ltd [No.3] (2008) 249 ALR 458; and Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd [2010] NSWCA 283.

The Court of Appeal found that

1. if the commercial purpose of the performance bond was to allocate risk pending final determination of the dispute, this fundamentally alters the context in which the Court must exercise its discretion whether to construe the recourse provision or not (per Osborn and Ferguson JJA at [31]);
2. more often than not performance bonds stand in a separate category when it comes to the question of whether the Court should decide a question of law on an interlocutory application (per Osborn and Ferguson JJA at [18]);
3. where grant of injunctive relief is effectively dispositive of a material part of the claim, the party seeking to restrain recourse must confront a heavy onus (at [33]);
4. the Trial Judge should have construed the recourse provision which was capable of construction in the absence of further evidence, at least on a provisional basis (per Osborn and Ferguson JJA at [38] and [53]. See also Kaye JA at [119]-[120] and [128]);
5. after observing that the Court of Appeal will not lightly interfere with an interlocutory judgment and that there must be clear error, the Court of Appeal found that the matters relied upon by the Trial Judge in favour of not construing the recourse provision did not outweigh the factors which favoured construction including the essential character and evident commercial purpose of the security (per Osborn and Ferguson JJA at [18], [59], [64] and [68]);
6. this also accorded with the overarching purpose of s7 in the Civil Procedure Act 2010, namely to facilitate the just, efficient, timely, and cost effective resolution of the real issues in dispute (per Osborn and Ferguson JJA at [55]).
7. until the recourse provision is construed, it is not possible to determine whether there was a serious question to be tried (per Osborn and Ferguson JJA at [42] and Kaye JA at [119]).
8. the trial of a separate question in relation to the construction of the recourse provision would not provide an appropriate vehicle for the resolution of interrelated issues arising upon an interlocutory injunction application (per Osborn and Ferguson JJA at [66] and Kaye JA at [127]).

Construction of the recourse provision

Kaye JA (with whom Osborn and Ferguson JJA agreed) construed clause 5.2 (at [129] – [149].

The Court of Appeal found that it was only necessary for the principal to be acting reasonably at the time it made the claim stated in the recourse notice based on the facts and circumstances which it knew or ought to have known concerning the validity of that claim (at [142] – [142]). It was not necessary for the principal to have knowledge which would decisively establish an entitlement to payment.

Serious Question to be tried

Kaye JA (with whom Osborn and Ferguson JJA agreed) analysed the evidence in relation to the principal’s claims referred to in the recourse notice, the builder’s defences to such claims and the builder’s cross claims. The Court found that there was no serious question to be tried in relation to whether the principal was acting reasonably in claiming approx. $2M (out of a total of $4.2M).

Balance of Convenience

Having found that there was no serious question to be tried in relation to recourse for approx. $2M, the Court of Appeal had to determine whether the balance of convenience favoured the grant of an interlocutory injunction in relation to the balance.

The Court found that the balance of convenience did not favour restraining recourse in relation to the balance.

Alleged irreparable harm to reputation

The builder relied on affidavit material in support of is contention that it would suffer irreparable damage to reputation if the principal was not restrained from having recourse to the security.

Kaye JA observed that the matters deposed to were largely in the nature of assertions. He then observed that any damage to reputation cause by recourse has already been suffered because of the Court’s finding that the principal was entitled to recourse to $2M (approx).

His Honour also noted that by agreeing to the recourse clause, the builder had agreed to assume the risk of damage to reputation.

Undertaking

At trial, the principal proffered an undertaking by a parent company “Wilmar” (the undertaking). Wilmar undertook that if the principal had recourse to some or all of the amounts secured by the undertakings, and if pursuant to a final judgment of the Court it was determined that the principal was not entitled to have recourse to that security, then Wilmar would repay the security to the builder.

On appeal, the principal argued that the Trial Judge had not given any or sufficient weight to the undertaking when considering the balance of convenience.

The Court of Appeal found that the Trial Judge’s finding that there was a risk that the principal would not be able to satisfy an award of damages in the event that the builder ultimately succeeded did not adequately take into account the undertaking (at [234]-[235]).