FEDERAL COURT OF AUSTRALIA Baulderstone Hornibrook Pty Ltd v Qantas Airways Ltd [2000] FCA 672 CONTRACTS – building contracts – irrevocable guarantee securing performance under contract – interlocutory injunction to restrain recourse to guarantee – when beneficiary entitled to call on guarantee – "may be entitled to the payment of moneys" – whether recourse to guarantee available before determination of liability under contract Bachmann Pty Ltd v BHP Power New Zealand Ltd [1999] 1 VR 420, applied Bendigo and Country Districts Trustees and Executors Co Ltd v Sandhurst and Northern District Trustees, Executors and Agency Co Ltd (1909) 9 CLR 474, followed Byrne v Castrique [1965] VR 171, followed Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812, applied Hughes Bros Pty Ltd v Telede Pty Ltd (1989) 7 BCL 210, not followed Royal Insurance Co Ltd v Midland Insurance Co Ltd (1908) 26 RPC 95, followed BAULDERSTONE HORNIBROOK PTY LTD v QANTAS AIRWAYS LIMITED V 643 of 1999 JUDGE: FINKELSTEIN J PLACE: MELBOURNE DATE: 19 MAY 2000 IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 643 of 1999 BETWEEN: BAULDERSTONE HORNIBROOK PTY LTD Applicant AND: QANTAS AIRWAYS LIMITED Respondent JUDGE: FINKELSTEIN J DATE OF ORDER: 19 MAY 2000 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The application be dismissed. 2. The applicant pay the respondent's costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 643 of 1999 BETWEEN: BAULDERSTONE HORNIBROOK PTY LTD Applicant AND: QANTAS AIRWAYS LIMITED Respondent JUDGE: FINKELSTEIN J DATE: 19 MAY 2000 PLACE: MELBOURNE REASONS FOR JUDGMENT 1 By a building works contract dated 15 September 1997 the applicant agreed to undertake works (the construction of a new terminal at Melbourne's Tullamarine Airport) for the respondent. The contract sum was $52,620,192. The applicant was required to provide security for the performance of its obligations under the contract. This security includes two unconditional bank guarantees for the aggregate sum of $2,692,144. Under each guarantee the respondent is permitted to make a call on the bank for payment without notice to the applicant, and the bank is required to pay the amount demanded notwithstanding any instruction by the applicant not to pay. The applicant is concerned that the respondent might call upon the guarantees and seeks an interlocutory injunction to prevent the respondent from doing so. 2 Before dealing with the merits of the application it is convenient to explain the nature of the litigation that has been commenced by the applicant. It is not, however, necessary to do so in great detail. The applicant was invited to submit a tender to carry out the works, part of which involve the construction of a service tunnel beneath the new terminal and the lowering of a road. To enable it to prepare its tender, the applicant was provided with certain drawings and other tender information. The applicant says that this information led it to conclude that the construction of the new terminal could be completed within 15 months and it submitted a tender with a works program to that effect. Now the applicant alleges that the information that it received was misleading because it was never possible to complete the works within the time fixed by the program. It contends that the respondent was aware, but did not disclose to the applicant, that it could not be given access to all parts of the site to enable the works to be completed in accordance with the program which ultimately found its way into the contract. 3 Alleging a cause of action based upon s 52 of the Trade Practices Act 1974 (Cth) (which prohibits a corporation from engaging in misleading or deceptive conduct) the applicant seeks relief including orders under s 87 for rectification of the building contract in two respects: (i) extending the time for the completion of various stages of the building works, and (ii) increasing the contract price. 4 The new terminal has not been completed and the building works are continuing. The date specified for practical completion, namely 29 January 1999, has passed. There have been 98 claims for extensions which the project manager has disallowed. Those claims have now been taken to arbitration, but as yet no hearing has taken place. 5 On 15 March 2000 the project manager notified the applicant that liquidated damages for delays between 29 July 1999 and 28 February 2000 had been provisionally assessed at $2,110,362.50. At that time the applicant was entitled to be paid $311,124.42 under the last progress certificate. In partial satisfaction of its claim for liquidated damages, the respondent deducted from the amount due to it under the provisional assessment a sum sufficient to discharge its obligation under the progress certificate. The respondent relied upon clause 10.14 of the building contract both as a source of the obligation to claim liquidated damages for delay and to effect the set off. Clause 10.14 provides: "10.14.01 If the Builder shall fail to bring a Stage to Practical Completion by the Date for Practical Completion for that Stage, then the Builder shall pay or allow to Qantas a sum or sums calculated and certified by the Project Manager at the rate stated in Item M of the Appendix to this Agreement as liquidated and ascertained damages applying to the particular Stage for the period during which the particular Stage shall remain or have remained not brought to Practical Completion. 10.14.02 Should the Date for Practical Completion for a Stage pass without that Stage having been brought to Practical Completion, the Project Manager may when issuing any progress certificate, issue with it a provisional assessment in writing of the amount then provisionally due by way of liquidated and ascertained damages and Qantas may deduct such amount from the amount certified and the amount so deducted shall be taken in partial satisfaction of the indebtedness of the Builder to Qantas for the amount subsequently certified under this Clause 10.14. 10.14.03 In the event of no further moneys being payable to the Builder or in the event of the sum calculated in accordance with this Clause 10.14 exceeding the amount remaining payable by Qantas to the Builder Qantas shall be entitled to recover the same, or any such excess, as a debt due to Qantas by the Builder." 6 The provisions of the building contract that require the applicant to provide security should be mentioned. Clause 10.20 imposes an obligation upon the applicant to "provide security for the due performance of [its] obligations under [the] agreement". Clause 10.21 deals with the form of security that must be provided. It includes unconditional bank guarantees. Clause 10.25 is concerned with the availability of the security. The clause reads: "Any security provided by the Builder in terms of this Agreement (including any retention or amount paid into the Retention Fund held by Qantas) shall be available to Qantas whenever Qantas may be entitled to the payment of moneys by the Builder under or in consequence of this Agreement (including but not limited to, any damages for breach of contract) or whenever Qantas may be entitled to reimbursement of any moneys paid to others under this Agreement, in all such cases as if the security were a sum of money due or to become due to the Builder by Qantas." 7 The applicant's claim for an injunction proceeds upon the basis that the respondent has a present right to recover the liquidated damages assessed by the project manager. The applicant says that the respondent will lose that right if the applicant is successful at trial in obtaining an order to vary the terms of the contract as regards time for performance. Accordingly the applicant says that it should be entitled to restrain the respondent from making a call under the guarantees until its right to do so has been finally determined. It points to the significant loss of reputation that it will suffer if it becomes known, as no doubt it will, that a claim has been made on the security that it provided under the contract. 8 This being a quia timet application, the applicant has the burden of proving such a possibility of danger as amounts to a "moral certainty" that the respondent threatens and intends to do something that will cause imminent and substantial damage to the applicant: Royal Insurance Co Ltd v Midland Insurance Co Ltd (1908) 26 RPC 95 at 100; Bendigo and Country Districts Trustees and Executors Co Ltd v Sandhurst and Northern District Trustees, Executors and Agency Co Ltd (1909) 9 CLR 474; Byrne v Castrique [1965] VR 171. 9 The evidence does not show that at the present time there is a sufficiently significant risk of the respondent calling upon the guarantors as to justify the grant of interlocutory relief. First, the respondent has not said that it proposes to make a call. Second, it has not made an implicit threat to that effect. In this regard I do not treat the respondent's refusal to give an undertaking not to make a call as evidence that it threatens do so. Too often a plaintiff will attempt to create a threat by requiring a defendant to undertake not to engage in certain conduct, and then relying upon the defendant's silence as evidence of a threat. In an appropriate case an inference may be drawn. This is not such a case. 10 There is another reason why I would refuse the relief sought. The generally accepted view, although not without its critics, is that in the absence of fraud or illegality a beneficiary cannot be restrained from calling upon an unlimited guarantee or other security that is given to secure the performance of contractual obligations: Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812. It is accepted, however, that the parties to the contract may specify the terms upon which the guarantee is to be available and, in such a case, an injunction may go to restrain a breach of those terms: Bachmann Pty Ltd v BHP Power New Zealand Ltd [1999] 1 VR 420. 11 The applicant argues that the general rule should be held to have no application to a case where the underlying contract may be reformed in a way that will result in there being no right to call upon the security. 12 The effect of clause 10.25 is that the security provided by the applicant is only relevantly available if the respondent is presently entitled to the payment of moneys under the building contract. The words "may be entitled" that qualify "the payment of moneys" are plainly conditional. In Hughes Bros Pty Ltd v Telede Pty Ltd (1989) 7 BCL 210, a case that considered the same standard form building contract, Cole J said that clause 10.25 permits the proprietor to have recourse to the security in circumstances where the proprietor has a claimed entitlement to moneys under the contract provided the claim is not specious or fanciful. His Honour drew a distinction between the expression "may be entitled" and "is entitled" and said that if the latter had been intended it would have been employed. Another approach, however, is to focus attention on whether the verb "be" is used in a conditional sense. If it is, then "may be entitled" does mean "is entitled". Reading clause 10.25 as a whole, this is what was intended, in my opinion: see also Bachmann, above, at 433-434. 13 If, as the applicant concedes, the respondent is presently entitled to recover the balance of the liquidated damages provisionally assessed by the project manager as a debt, then the security provided by the applicant may be called up. The fact that this might change with the grant of final relief does not affect the present position. That is, the respondent's entitlement to recover the debt and call up the security will remain until discharged by payment or nullified by court order. 14 In a proceeding where an order might be made eliminating the ability to make a call on the security, is the applicant entitled to an injunction to restrain a call pending the resolution of the proceeding? Generally speaking, the answer should be in the negative. The security has been provided to satisfy existing entitlements and the beneficiary should be entitled to call upon the security while those entitlements exist. If it turns out that the call should not have been made, any money obtained under the security will be refunded. 15 On the other hand, I accept that, in an appropriate case, the court may restrain a call being made. For example, in a case such as the present where one party seeks to have the contract varied, if reformation of the contract were likely to succeed it might be inferred that a claim upon the security made before adjudication is fraudulent. The court might also intervene if there was a real risk that the plaintiff could not recover any money obtained by the defendant. But these are not matters that need be resolved at present. 16 I have indicated that the applicant has put its case on the basis that it is indebted to the respondent for liquidated damages. Whether this is the true position is not clear. Clause 10.14.03 will convert the amount of a provisional assessment into a recoverable debt "in the event of no further moneys being payable" to the applicant from which the amount of the assessment may be deducted. Must there be "no further moneys … payable" when the provisional assessment is made or when the contract has been performed? This is an important issue because the applicant is continuing to perform works under the contract and further moneys will become due to it. Dependent upon the proper construction of clause 10.14.03 it could be that there is no debt presently owing to the respondent. 17 The applicant has not addressed the construction of clause 10.14.03 in its submission and the respondent has done no more than acknowledge the existence of the competing views. In this state of affairs I will not attempt to resolve the matter although that may become necessary in the future. Thus, if the respondent does attempt to convert the guarantees to cash before this action has been finally determined, the applicant may move for a restraining order on the ground the respondent is not entitled to make the call. That will be an appropriate occasion to deal with the construction of the clause. 18 In the meantime the application is dismissed with costs. I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein. Associate: Dated: 19 May 2000 Counsel for the Applicant: Mr P Hayes QC Mr C Harrison Solicitor for the Applicant: Gadens Lawyers Counsel for the Respondent: Mr A Archibald QC Mr J Twigg Solicitor for the Respondent: Blake Dawson Waldron Date of Hearing: 5 May 2000 Date of Judgment: 19 May 2000