G&S Engineering Services Pty Ltd v MACH Energy Australia Pty Ltd

1. [1]

   On 10 March 2017 the plaintiffs, G&S Engineering Services Pty Ltd and DRA Pacific Pty Ltd (“the Contractors”) entered a contract entitled “Mount Pleasant Project Design and Construct Contract” with the first defendant, MACH Energy Australia Pty Ltd to carry out “Works” relating to a coal handling and preparation plant and train load out facility for a coal mine in the Hunter Valley. In the Contract, MACH Energy was named as “the Company”.

2. [2]

   On 14 August 2018, the second defendant, MACH Mount Pleasant Operations Pty Ltd and the Contractors entered a “Deed of Novation” (“the Novation Deed”). Irrespective of whether the Novation Deed had the effect of creating a new contract, or of amending the original Contract, it is common ground that it was effective in accordance with its terms.

3. [3]

   One of those terms was that each reference in the Contract to MACH Energy was to be read as if it were a reference to MACH Operations, as agent for MACH Energy and the third defendant, JCD Australia Pty Ltd, in the “proportions” of 95% and 5% respectively. That is, it was agreed that MACH Operations, as such agent, became “the Company” for the purposes of the Contract. This evidently reflected an arrangement, the details of which were not before me, whereby MACH Energy sold 5% of its interest in the Contract to JCD.

4. [4]

   For the sake of simplicity, I shall refer simply to “the Contract” to describe the agreement governing the parties’ rights following execution of the Novation Deed.

5. [5]

   The Contract required the Contractors to lodge with “the Company”, then MACH Energy, unconditional surety bonds in favour of MACH Energy for a specified amount. The Contractors did so.

6. [6]

   Four are relevant. Two surety bonds were issued by the Commonwealth Bank of Australia on 4 August 2017. Two were issued by Liberty Mutual Insurance Company on 7 August 2018. Each is for some $1.8 million and requires the issuer to pay that sum to MACH Energy on demand by MACH Energy. I will refer to these documents as “the Security”.

7. [7]

   On 1 March 2019 MACH Energy gave notice (the “First Drawdown Notice”) to the Contractors of its intention to have recourse to the Security, pursuant to cl 45.4 of the Contract.

8. [8]

   On 18 March 2019 MACH Operations gave notice (the “Second Drawdown Notice”) of its intention to have recourse to the Security.

9. [9]

   The basis of each of these notices is the allegation that Contractors failed to achieve practical completion of various “Separable Portions” of the Works by the dates for practical completion of those Separable Portions. MACH Energy and MACH Operations therefore contend that the Contractors are liable to pay liquidated damages in an amount of some $3.8 million. There is a dispute about these matters about which, it is common ground, I am not able to and nor should I draw any conclusion.

10. [10]

    The Contractors now seek an interlocutory injunction restraining MACH Energy and MACH Operations (which I will collectively refer to as “the MACH interests”) from calling on the Security on the basis that:

11. [11]

    On 5 March 2019, on the Contractors giving the usual undertaking as to damages, the MACH interests undertook to refrain from calling on the Security until the outcome of this application.

Decision

1. [12]

   An interlocutory injunction to restrain MACH Energy and MACH Operations from calling on the Security should be granted.

The provisions concerning “recourse to” and “return of” the Security

1. [13]

   The key provisions of the Contract are cll 45.4 and 45.5.

2. [14]

   It is common ground that although as drafted, subcl 45.4(d) contains a paragraph (iv), that paragraph should appear as a “chaussette” (per Perram J in SMA Solar Technology AG v Beyond Building Systems Pty Ltd (No 5) [2012] FCA 1483 at [79]) to subcl 45.4(d).

3. [15]

   It is thus common ground that cl 45.4 should be read as it was in this form:

4. [16]

   Clause 45.5 provides:

5. [17]

   Clause 45.4(a)(iii) refers to cl 46.13, which provides:

Return of the Security

1. [18]

   Clause 43.1 of the Contract empowered the “Company Representative” to direct a “Variation to the Works” including to “omit any part or parts of the Works”.

2. [19]

   On 22 December 2018, MACH Energy served on the Contractors a “Variation Notice”. The parties referred to this document as “the Descoping Notice”.

3. [20]

   The effect of the Descoping Notice was that, except for certain specified “Engineering Services”, the remainder of the Works comprising Separable Portions 2 and 3, which were not then completed, were “omitted” from the Contractors’ Works under the Contract.

4. [21]

   It is common ground that it followed that:

5. [22]

   In the circumstances, Mr Christie SC, who appeared with Mr Hume and Mr Wacker for the Contractors, submitted that to give business efficacy to the Contract, and cl 45.5(a)(i) and (ii) in particular, a term was to be implied in the Contract that:

6. [23]

   Otherwise, it was submitted, the Contractors “could never satisfy the precondition to the return of the securities and the Defendants could retain the securities forever”.

7. [24]

   Mr Christie submitted that such a term is reasonable and equitable, is so obvious it went without saying, was capable of clear expression and did not contradict any express term of the Contract: see BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 at 283.

8. [25]

   In that regard Mr Christie referred to an implication to a similar effect drawn by Barrett J, albeit in somewhat different circumstances, in Eddy Lau Constructions Pty Ltd v Transdevelopment Enterprise Pty Ltd [2004] NSWSC 273.

9. [26]

   In that case, Barrett J found that the contract was repudiated by the company, and terminated by the contractor, while the works were in progress. There was therefore no expression of the contract to which the contractor could point as a source of a right for the return of the bank guarantees provided by it: at [94].

10. [27]

    Barrett J found that a non-contractual basis existed for the return of the security. That was that there was “nothing for which the bank guarantees can stand as security”: at [96]. Further, at [97], His Honour held:

11. [28]

    Mr Christie submitted that if such a term were to be implied, it would “sit outside” cl 45.5 and would not be qualified by the conditions in cl 45.4.

12. [29]

    In my opinion, there is a serious question to be tried as to whether such a term is to be implied.

13. [30]

    Turning now to cl 45.5 itself, in a supplementary note, Mr Miller SC and Ms Simpson, who appeared for the MACH interests, accepted that the result of the issue of the Descoping Notice was that, as the Contractors “were no longer able to achieve” (and, I would add, not permitted to achieve) “Functional Completion” for the purposes of cl 45.5(a)(i) and (ii). In those circumstances, Mr Miller and Ms Simpson submitted that “a Certificate of Practical Completion for any [Separable Portion] was, for all intent[s] and purposes a Certificate of Functional Completion”.

14. [31]

    Certificates of Practical Completion were issued in relation to the relevant Separable Portions on 16 and 24 January 2019.

15. [32]

    It followed from this submission, as Mr Miller accepted in oral argument, that the Company’s obligations under cl 45.5 were prima facie enlivened.

16. [33]

    However, Mr Miller submitted, this was subject to the operation of the chaussette to cl 45.5, the effect of which is that what might otherwise be an obligation to return securities under cl 45.5 is not enlivened if:

17. [34]

    Mr Miller and Ms Simpson pointed to correspondence, including the Descoping Notice itself that, they submitted, showed that the Company Representative had, on behalf of the Company, manifested an intention to make a claim on the Security and that the Contractors understood this.

18. [35]

    Thus:

19. [36]

    Mr Miller and Ms Simpson submitted that this exchange of correspondence showed not only that MACH Energy had “a claim or intends to claim” against the Security, but that it had manifested an intention to make such a claim; and that, by their letter of 11 January 2019, the Contractors had acknowledged this. Accordingly, it was submitted, the chaussette to cl 45.5 was enlivened such that no obligation had arisen under cl 45.5 to return the Security.

20. [37]

    Mr Miller submitted I should decide this issue on a final basis, and favourably to the MACH interests.

21. [38]

    However, a difficulty arises.

22. [39]

    In their List Statement, the Contractors adverted in terms to the chaussette to cl 45.5 and pleaded, as one of their contentions as to why cl 45.5 was engaged:

23. [40]

    In effect, the Contractors pleaded that the chaussette to cl 45.5 had not been enlivened, as at 22 December 2018.

24. [41]

    The List Response dealt with that allegation as follows:

25. [42]

    In those circumstances, Mr Christie, Mr Hume and Mr Wacker submitted:

26. [43]

    Mr Christie put the matter this way in oral submissions:

27. [44]

    Mr Christie’s reference to “the reasonableness of the company representatives’ position” was a reference to subcl 7.2(b) of the Contract which provides:

28. [45]

    In a note delivered after the hearing, Ms Simpson submitted that “[a] pleading of fact may be traversed by denial or non-admission” and that the effect of the relevant paragraph of the List Response was to put the Contractors to proof that the chaussette to cl 45.5 of the Contract was not engaged.

29. [46]

    In passing, I note that Practice Note SC Eq 3 at [11] requires a defendant to “admit or deny the allegations the plaintiff makes” and does not permit a “non-admission”.

30. [47]

    In any event, the List Response did not merely “not admit” that, as at 22 December 2018, “the Company Representative on behalf of the Company” had no claim against the Security for the purposes of the chaussette to cl 45.5. It went further and contended that that allegation was not “relevant to the Defendants’ present right to have recourse to the Securities”.

31. [48]

    In those circumstances, I see substance in Mr Christie’s submission that, in light of the pleadings, the Contractors were entitled to assume that no issue would be taken about the enlivenment of the chaussette, at least on this interlocutory application, and that it would not be just for me now to make a final determination of the issue.

32. [49]

    It is true that, in the correspondence to which I have referred to at [35], the Company Representative of MACH Energy appears to make clear that MACH Energy proposes to make a claim against the Security and the Contractors appear to acknowledge, although dispute, that purported entitlement.

33. [50]

    However, as Mr Christie, Mr Hume and Mr Wacker pointed out in their written submissions in reply, the chaussette to cl 45.5 refers to “the Company Representative on behalf of the Company” having a claim or an intention to claim against the Security. The effect of the Novation Deed is that “the Company” is now MACH Operations, and not MACH Energy. And yet each item of correspondence on which Mr Miller and Ms Simpson relied was signed by identified individuals as “Company Representative” and each document was on MACH Energy letterhead. There is a serious question to be tried as to whether these documents manifested a claim or an intention to claim by “the Company”: MACH Operations.

34. [51]

    In their reply submissions, Mr Christie, Mr Hume and Mr Wacker said:

35. [52]

    Further, Mr Christie submitted, and I must accept, that by reason of the pleaded irrelevance of the allegation made in the List Statement the Contractors did not understand that the MACH interests would contend that the alleged enlivenment of the chaussette to cl 45.5 was not only relevant, but determinative.

36. [53]

    Ms Simpson, who made oral submissions in response to those of Mr Christie that I have set out, sought “leave to amend the pleading, and for the matter to be stood over to enable whatever further evidence Mr Christie may have as to the company’s representative’s intention to be adduced, so that the matter can be dealt with finally”.

37. [54]

    I was not prepared to grant that leave nor to stand the matter over.

38. [55]

    My conclusion, in these very peculiar and somewhat unfortunate circumstances, is that, in addition to there being a serious question to be tried as to the implication of the term for which Mr Christie, Mr Hume and Mr Wacker contended, there is also a serious question to be tried as to whether the chaussette to cl 45.5 has been enlivened.

39. [56]

    It follows that there is also a serious question to be tried as to whether MACH Energy or MACH Operations is obliged to return the Security.

40. [57]

    That being so, the balance of convenience clearly favours granting an interlocutory injunction to restrain either MACH Energy or MACH Operations from calling on the Security, at least until final determination of the question of whether the Security must be returned.

Which party, if any, is entitled to call on the Security?

1. [58]

   As I have said, the effect of the Novation Deed is that MACH Operations (as agent for MACH Energy and JCD) has been substituted for MACH Energy as “the Company” for the purposes of the Contract.

2. [59]

   The only party entitled by cl 45.4 of the Contract to have recourse to the Security is “the Company”, now MACH Operations.

3. [60]

   MACH Energy is no longer entitled to call on the Security and, on the face of it, was not entitled to give the First Drawdown Notice.

4. [61]

   Mr Miller sought to deal with this point by submitting that I should construe the First Drawdown Notice as having been made by MACH Operations, rather than MACH Energy.

5. [62]

   I do not accept that submission. The First Drawdown Notice is on MACH Energy letterhead. It is expressed to be made by “the Company” which, as used in that document, can only mean MACH Energy.

6. [63]

   The Second Drawdown Notice is made by MACH Operations.

7. [64]

   The difficulty with this is that MACH Operations is not the beneficiary named in the Security. The Security issued by the CBA and Liberty is addressed to MACH Energy, and contains a promise by CBA and Liberty to pay the relevant sum to MACH Energy on demand being made by MACH Energy.

8. [65]

   By reason of the Novation Deed, MACH Operations is now “the Company” for the purpose of the Contract as agent for MACH Energy, but also as agent for JCD.

9. [66]

   In those circumstances, I doubt that the issuers of the Security would respond to a call by MACH Operations.

10. [67]

    In any event, Mr Christie submitted that, on the proper construction of the Contract, “there is an implied negative stipulation that only the beneficiary of the lodged security will have recourse to it”.

11. [68]

    The matter was put this way in the Contractors’ List Statement:

12. [69]

    I accept that there is a serious question to be tried as to whether that is so.

13. [70]

    These matters comprise a further reason to restrain MACH Energy and MACH Operations from calling on the Security.

Balance of convenience

1. [71]

   As I have already stated, in these circumstances, the balance of convenience favours granting interlocutory relief.

2. [72]

   Further, on behalf of the Contractors, it was submitted that “if recourse were had to the security, it would be reasonably likely to cause harm to the [Contractors’] commercial reputation and financial position”.

3. [73]

   In Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd [2010] NSWCA 283 Macfarlan JA said at [45]:

4. [74]

   Young JA said something to the same effect at [67]-[70].

5. [75]

   Further there is evidence, which I received on a confidential basis, to suggest that if either MACH Energy or MACH Operations called on the Security, but were ultimately unsuccessful on the final resolution of the dispute under the Contract, the Contractors would have difficulty (or “no chance” as Mr Christie put it) to recoup the funds so paid.

6. [76]

   It is sufficient to record that on 16 March 2018 the auditor of the Australian parent of MACH Energy and MACH Operations, MACH Australia Holdings Pty Ltd, referred to aspects of the financial report for that company for the year ended 31 December 2017 which “raise doubt about the Group’s ability to continue as a going concern”.

7. [77]

   On the other hand, Mr Miller submitted that “the money point is neutral” as there was some material to suggest that the Contractors’ financial position is dependant to some extent on a letter of support from their parent, DRA Group Holdings Pty Ltd. Accordingly, Mr Miller submitted such that there is a question as to the value of the undertaking as to damages that the Contractors must give in order to secure interlocutory relief.

8. [78]

   I am not in a position to make a detailed assessment of these matters.

9. [79]

   However, overall, I am satisfied that the current financial position of the parties is a further pointer to the conclusion that the balance of convenience favours the granting of interlocutory relief.

The proper construction of cl 45.4

1. [80]

   In light of my conclusions so far, it is not necessary for me to address the other arguments advanced by the parties.

2. [81]

   However, in deference to the careful submissions developed by the parties as to the proper construction of cl 45.4, I shall express an opinion about that question.

3. [82]

   There are two reasons why a contract might have provision for a performance guarantee.

4. [83]

   As Callaway JA said in Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812 at 826-827:

5. [84]

   Macfarlan JA made observations to the same effect in Lucas Stuart at [39]-[40]. As Macfarlan JA observed “not every contract seeks to achieve both goals”: at [40].

6. [85]

   In each case, the Court’s task is to construe the contract in question and thereby ascertain the parties’ intention.

7. [86]

   Some guidance may be obtained from decisions in other cases but care must be taken not to be diverted from the language used in the contract under consideration.

8. [87]

   Subclause 45.4(d) is a promise by the Contractors not to seek to restrain the Company from exercising its right under the Security “even where the Contractor disputes the Company’s right to payment”.

9. [88]

   It is common ground that a “no injunction” clause such as this is a purported ouster of the jurisdiction of the Court and thus, as a matter of public policy, unenforceable.

10. [89]

    However, it does not follow that regard cannot be had to subcl 45.4(d) for the purpose of ascertaining the parties’ intention and construing cl 45.4 as a whole.

11. [90]

    Thus in CPB Contractors Pty Ltd v JKC Australia Lng Pty Ltd (No 2) [2017] WASCA 123, Buss P, Murphy and Beech JA said, at [95]:

12. [91]

    Similar observations were made by the Victorian Court of Appeal in Anaconda Operations Pty Ltd v Fluor Daniel Pty Ltd [1999] VSCA 214 at [15] (Brooking JA, Ormiston and Buchanan JJA agreeing).

13. [92]

    Thus, while subcl 45.4(d) is not by itself a reason to refuse the Contractors’ application for interlocutory relief, it remains available as an aid to ascertaining the proper construction of cl 45.4.

14. [93]

    The language used in subcl 45.4(a), taken in isolation, is objective in that it permits the Company to have a course to the Security if it:

    1. (1)

       “is owed money by the Contractor under the Contract”: par (a)(ii), or

    2. (2)

       “has become entitled to exercise a right under the Contract in respect of money owing” to it: par (a)(iii).

15. [94]

    Clause 45.4(a)(iii) incorporates by reference cl 46.13. I do not see that this takes matters any further. The language there used is also objective and refers to the Company’s entitlement to “deduct, set off, withhold or retain from moneys otherwise due to the Contractor” any debt or other money “due” from the Contractor to the Company.

16. [95]

    But subcl 45.4(a) must be read with subcl 45.4(d) which, for the reason I have set out, is available to ascertain the parties’ intention as to the operation of cl 45.4 as a whole.

17. [96]

    Subclause 45.4(d) contemplates, in terms, that the Contractors may “dispute” the Company’s right to payment but provides that the Contractor is not to seek to restrain the Company’s recourse to the Security for that reason.

18. [97]

    Accepting that such an agreement is not enforceable, it nonetheless bespeaks the parties’ intention and agreement that the Company is entitled to recourse to the Security in circumstances where the Contractors dispute its entitlement to do so. As Mr Miller and Ms Simpson submitted, “the parties expressly contemplated that the Company would have recourse to the Security during a ‘dispute’”.

19. [98]

    This demonstrates that the parties intended that cl 45.4 operate not merely as security for the Company lest the Contractors prove financially unable to pay any sum ultimately found to be due. They also intended the clause to constitute a risk allocation mechanism; enabling the Company to gain access to the amount it contends to be due, notwithstanding a dispute about its entitlement to those amounts and even if, at the end of the day, it is found not to be entitled to those amounts.

20. [99]

    While each case must be determined in accordance with wording of the particular contract in question, this conclusion is consistent with those reached in other cases where the parties have made express reference to the possibility of a dispute about a principal’s entitlement to recourse to the security: see for example Clough Engineering Ltd v Oil & Natural Gas Corporation Ltd [2008] FCAFC 136; (2008) 249 ALR 458 at [93] to [94]; Saipem Australia Pty Ltd v GLNG Operations Pty Ltd (No 2) [2016] 1 Qd R 254; [2015] QSC 173 at [51] and [60].

21. [100]

    Contrary to the Contractors’ submissions, I do not consider that the form of security bond annexed to the Contract affects this conclusion. Unsurprisingly, that document proposes that its issuer give an unconditional promise to pay on demand. It is in the nature of such documents that they be unconditional. That casts no light on the parties’ intention as manifested by the words they used in cl 45.4.

22. [101]

    Nor do I think either cll 64.3 or 64.11 to be relevant.

23. [102]

    Clause 64.3 provides:

24. [103]

    Mr Christie submitted orally that this provision, and subcl 64.3(b) in particular, had the effect of “cancelling out” the “no injunction” provision in subcl 45.4(d).

25. [104]

    Mr Christie, Mr Hume and Mr Wacker put the matter this way in their reply submissions:

26. [105]

    I do not agree. Subclause 64.3(b) is directed to a different question. It is a submission to jurisdiction clause and does no more than constitute the parties’ agreement not to object to the fact that any proceedings are brought in a court in NSW. As Ms Simpson submitted in her supplementary note, the Contractors’ submission conflates an agreement as to jurisdiction with an agreement as to the relief granted in exercise of that jurisdiction.

27. [106]

    Clause 64.11 is in the following terms:

28. [107]

    Again, I do not consider this clause has anything to say about the question before me. It is, as Ms Simpson submitted, a boilerplate provision, designed to prevent any “void, illegal or unenforceable” provision in the Contract having the effect of causing the Contract as whole to be void, illegal or unenforceable. It does not affect the availability of subcl 45.4(d), as material relevant to the proper construction of the Contract as a whole, and cl 45.4 in particular.

29. [108]

    In their reply note, the Contractors submitted that the effect of cl 64.11 is that “cl 45.4(c) must be severed if it is invalid” and that “if it is invalid, it must be severed or else the contract will fall with it”.

30. [109]

    I do not agree. Clause 64.11 does not say that an “invalid, illegal or unenforceable” provision “shall be severed” from the Contract (as was the case in Birstar Pty Ltd v Proprietors “Ocean Breeze” Building Units Plan No 4745 [1997] 1 Qd R 117 at 132). Nor does it say that the Contract “is to be read and construed as if that part had been severed” (as was the case in Farleigh Investments Pty Ltd v Reefking Pty Ltd [2002] WASC 115 at [11], [66] and [69]). The clause simply says that such a provision is “severable”.

31. [110]

    The effect of the “void, illegal or unenforceable” provision being “severable” is that the Contract is treated as “divisible” so that “the part which is void may be separated from the rest and does not affect is validity”: Life Insurance Co of Australia Ltd v Phillips (1925) 36 CLR 60 at 72; [1925] HCA 18 (Knox CJ).

32. [111]

    In my opinion, it follows from this that, although “severable”, subcl 45.4(d) remains available to determine the parties’ intention which I as I have set out above.

Conclusion

1. [112]

   I invite the parties to bring in short minutes to give effect to these reasons.