Supreme Court New South Wales Medium Neutral Citation: Martinus Rail Pty Ltd v Qube RE Services (No 2) Pty Ltd [2023] NSWSC 1550 Hearing dates: 11 December 2023 Date of orders: 20 December 2023 Decision date: 20 December 2023 Jurisdiction: Equity - Commercial Arbitration List Before: Rees J Decision: Refuse application for interim measures. Catchwords: COMMERCIAL ARBITRATION — Interim measures — Contractor provides security by unconditional undertakings from bank — Principal yet to make demand to bank — Principles at [3]-[9] — Contractor obtains ex parte injunction restraining principal from making demand to bank — Whether interlocutory measure should be made pending arbitration — Whether right to call on bank guarantee a 'risk allocation device' — principal entitled to call on guarantee at an early stage in the dispute BUILDING AND CONSTRUCTION — Where adjudication determinations rendered — Whether right to call on bank guarantees in construction contract void under s 34 of the Building and Construction Industry Security of Payment Act 1999 (NSW) — Case law review at [94]-[102] — Adjudication determination does not stand in the way of the principal making a demand on security INTERLOCUTORY INJUNCTION — Whether serious question to be tried as to principal's right to have recourse to bank guarantee — Principal required to "act reasonably" — No serious question to be tried as to whether the principal was "acting reasonably" in forming the view that the principal was entitled to terminate for cause — Balance of convenience favours principal. Legislation Cited: Commercial Arbitration Act 2010 (NSW) Building and Construction Industry Security of Payment Act 1999 (NSW) Cases Cited: Acciona Infrastructure Projects Australia Pty Ltd v EnerMech Pty Ltd [2023] NSWSC 1565 Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57 Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618; [1968] HCA 1 Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd (2008) 249 ALR 458; [2008] FCAFC 136 CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd (No 2) [2017] WASCA 123 Daewoo Shipbuilding & Marine Engineering Co Ltd v INPEX Operations Australia Pty Ltd [2022] NSWSC 1125 Descon Group Australia Pty Ltd v 35 Merivale Pty Ltd [2023] QSC 276 Dualcorp Pty Ltd v Remo Constructions Pty Ltd (2009) 74 NSWLR 190; [2009] NSWCA 69 Fabtech Australia Pty Ltd v Laing O'Rourke Australia Construction Pty Ltd [2015] FCA 1371 FMT Aircraft and Gate Support Systems 8B v Sydney Ports Corporation [2010] NSWSC 1108 Grocon (Belgrave St) Developer Pty Ltd v Construction Profile Pty Ltd [2020] NSWSC 409 Harlech Enterprises Pty Ltd v Beno Excavations Pty Ltd [2022] ACTCA 42 John Holland Pty Ltd v Roads and Traffic Authority of New South Wales [2007] NSWCA 140 Kawasaki Heavy Inustries Ltd v Laing O'Rourke Australia Construction Pty Ltd (2017) 96 NSWLR 329; [2017] NSWCA 291 Lucas Stuart v Hemmes Hermitage Pty Ltd [2010] NSWCA 283 Mineralogy Pty Ltd v Sino Pty Ltd [2016] WASCA 105 Patterson Building Group Pty Ltd v Holroyd City Council [2013] NSWSC 1484 Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd (2018) 264 CLR 1; [2018] HCA 4 Reid Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd (1999) 15 BCL 158 RJ Neller Building Pty Ltd v Ainsworth [2008] QCA 397 Siemens Gamesa Renewable Energy Pty Ltd v Bulgana Windfarm Pty Ltd [2019] VSCA 318 Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85; [2016] HCA 47 Sugar Australia Pty Ltd v Lendlease Services Pty Ltd [2015] VSCA 98 Wood Hall Ltd v The Pipeline Authority (1979) 141 CLR 443 Texts Cited: UNCITRAL Model Law on International Commercial Arbitration (as adopted by the United Nations Commission on International Trade Law on 21 June 1985, and as amended by the United Nations Commission on International Trade Law on 7 July 2006) Category: Principal judgment Parties: Martinus Rail Pty Ltd (Plaintiff) Qube RE Services (No 2) Pty Ltd (Defendant) Representation: Counsel: Mr S Robertson SC / Mr AR Langshaw (Plaintiff) Mr TJ Breakspear SC / Mr TJ Boyle (Defendant) Solicitors: Maddocks Lawyers (Plaintiff) King & Wood Mallesons (Defendant) File Number(s): 2023/304512 JUDGMENT 1. HER HONOUR: The plaintiff contractor, Martinus Rail Pty Ltd, seeks to restrain the defendant principal, Qube RE Services (No 2) Pty Ltd, from calling on unconditional undertakings issued by the Commonwealth Bank of Australia totalling some $7 million. 2. The contractor relied on the evidence of its solicitor, Mathew Stulic, and project director in the Major Projects Team, Brian Downey. The principal relied on the evidence of general manager, Simon Barney. There was no cross-examination. A large number of documents were tendered. Principles 1. Drawing on my judgment in Daewoo Shipbuilding & Marine Engineering Co Ltd v INPEX Operations Australia Pty Ltd [2022] NSWSC 1125, where parties have agreed to arbitrate, the Court has power to issue an interim measure in relation to the arbitral proceedings, to be exercised in accordance with the Court's own procedures but taking into account the specific features of a domestic commercial arbitration: section 17J, Commercial Arbitration Act 2010 (NSW), which gives effect to Article 17J, UNCITRAL Model Law on International Commercial Arbitration (as adopted by the United Nations Commission on International Trade Law on 21 June 1985, and as amended by the United Nations Commission on International Trade Law on 7 July 2006) (the Model Law). The power to make interim orders should be exercised sparingly and to support, rather than usurp, the arbitral process. 2. The test in Australian law as to whether an interlocutory injunction should be granted is set out in Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57 by Gummow and Hayne JJ (with whom Gleeson CJ and Crennan J agreed) at 81 [65] (quoting with approval Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618; [1968] HCA 1): The first is whether the plaintiff has made out a prima facie case, in the sense that if the evidence remains as it is there is a probability that at the trial of the action the plaintiff will be held entitled to relief … The second inquiry is … whether the inconvenience or injury which the plaintiff would be likely to suffer if an injunction were refused outweighs or is outweighed by the injury which the defendant would suffer if an injunction were granted. 1. How strong the probability of success at trial needs to be depends on the nature of the rights the plaintiff asserts and the practical consequences likely to flow from the orders the plaintiff seeks: Australian Broadcasting Corporation v O'Neill at 81 [67]; Mineralogy Pty Ltd v Sino Pty Ltd [2016] WASCA 105 at [87] (per Newnes JA, McLure P and Corboy J agreeing). As I noted in Daewoo, this consideration finds particular resonance on an application to injunct a party from calling on a bank guarantee: at [71]. The position at general law is that courts should not interfere with unconditional performance bonds and bank guarantees. These instruments are to be treated "as good as cash": Wood Hall Ltd v The Pipeline Authority (1979) 141 CLR 443 at 457 (per Stephen J). The main exceptions to this principle are in cases of fraud, unconscionable conduct or where the contractual requirements to have recourse to such a security have not been satisfied: Reid Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd (1999) 15 BCL 158 at 164 (per Austin J); Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd (2008) 249 ALR 458 at [77]-[78]; Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85 at [8] (per French CJ). 2. I summarised the resulting position in Daewoo as "Ordinarily, on an application to injunct a call on a bank guarantee, the plaintiff must demonstrate a strong or serious prima facie case": at [3] (albeit cross-referenced to more detailed consideration of the principles later in the judgment). The plaintiff submitted that the standard of a "strong prima facie" is inconsistent with the test as stated by the High Court in Australian Broadcasting Corporation v O'Neill. The plaintiff did not take issue with the proposition that an injunction to restrain a call on a bank guarantee may fall within a class of cases where it may be difficult to obtain an injunction without a strong prima facie case. However, the plaintiff rejected any suggestion that a special principle applied to such cases. The former proposition should be accepted and, to the extent the latter was suggested, it should be clarified. The comments made in respect of a "strong prima facie case" were merely a reflection of the fact that the strength of the prima facie case required will depend on the circumstances of the case including the contractual provisions in question (as Daewoo has been applied by Davis J in Descon Group Australia Pty Ltd v 35 Merivale Pty Ltd [2023] QSC 276 at [64]-[65]). Indeed, as I explained in Daewoo at [84]: As Gleeson CJ observed in Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199; [2001] HCA 63 at [18]: The extent to which it is necessary, or appropriate, to examine the legal merits of a plaintiff's claim for final relief, in determining whether to grant an interlocutory injunction, will depend upon the circumstances of the case. There is no inflexible rule. It may depend upon the nature of the dispute. 1. The need for serious consideration to be given to the merits of the dispute in the context of a claim to injunct a bank guarantee is merely a reflection of the commercial context in which such a claim arises. As explained in Sugar Australia Pty Ltd v Lendlease Services Pty Ltd [2015] VSCA 98 at [31] (reproduced in Daewoo at [77]): Whilst it may be accepted that the usual principles governing interlocutory injunctions fell to be applied in the present case, it must also be accepted that they fell to be applied in respect of an unusual form of contract, if it be the case that the commercial purpose of the performance bond was to allocate risk pending final determination of the dispute. Such a contractual provision fundamentally alters the context in which the court must exercise its discretion by changing the complexion of the status quo and raising the prospect of substantial injustice if the purpose of the provision is defeated. That is, the status quo in such circumstances becomes what the parties have agreed as to which of them should bear the financial risk pending final determination, not the continuation of where that risk would naturally fall in the absence of a performance bond to call upon. 1. As indicated in the above passage, on an interlocutory application to injunct a call on a bank guarantee, the Courts commonly examine the contractual provisions and the terms of the bank guarantee, to ascertain whether the contractual regime is intended to provide security or a 'risk allocation device', or both. Where the contractual purpose of a bank guarantee is to provide security, this protects against the situation where a contracting party has a valid claim but there are difficulties in recovering from the party in default, in which case, recourse may be had against the bank. In that event, the principal has no authority to call on the bank guarantee pending resolution of the dispute. Where a bank guarantee security is a 'risk allocation device', the contract establishes a 'pay now, argue later' regime, where the beneficiary is able to call on the guarantee even if it turns out, in the end, that the other party was not in default; the clause identifies which party is to be 'out of pocket' pending resolution of a dispute: Daewoo at [5]-[10]. 2. Whether the contract requires a bank guarantee to be provided as security or operates as a 'risk allocation device' bears upon the Court's discretion whether to restrain recourse to the bank guarantee pending final determination of the dispute: Sugar Australia at [21] (Osborn and Ferguson JJA). Where the clause is not a 'risk allocation device' and there is a serious question to be tried as to what obligation or liability is secured by a performance bond, these questions should be left for the arbitral tribunal to decide: Kawasaki Heavy Industries Ltd v Laing O'Rourke Australia Construction Pty Ltd (2017) 96 NSWLR 329; [2017] NSWCA 291 at [96]-[98]. 3. As such, it may be necessary on an interlocutory application such as this to closely examine the legal basis which the plaintiff claims that the defendant is not entitled to recourse to the security. This may require the Court to construe the contractual provisions, not so as to bind the arbitral tribunal but in order to satisfy itself that the Court should exercise its power to make interim measures to preserve the status quo until the arbitral tribunal can finally determine the matter: Daewoo at [84]-[86]. The project 1. Turning then to this case, the Moorebank Intermodal Precinct is the largest intermodal logistics precinct in Australia and is a nationally significant infrastructure project. (As I understood it, intermodals enable easy movement of containers from ships to another mode of transport such as rail or road). The precinct covers 24 hectares of land in South-West Sydney and is linked directly to Port Botany. The precinct includes an Import Export (IMEX) Rail Terminal, Interstate Rail Terminal, warehousing, inter-connecting road links (the M5 and M7), rail links and a dedicated rail freight link to Port Botany via the South Sydney Freight Line. 2. In 2015, the principal entered into the Development and Operations Deed with National Intermodal, a government business enterprise owned by the Commonwealth Government, to perform development works for the Moorebank Intermodal Precinct. Under the deed, the Interstate Rail Terminal and rail access works are to be completed by a Sunset Date, being 19 December 2023. (The Sunset Date was later extended by agreement to 24 January 2024.) The contractor 1. The contractor is a railway infrastructure company that builds and maintains railways and intermodals in Australia, New Zealand and elsewhere. The sole director of the company is Treaven Martinus. 2. As a matter of usual industry practice, the contractor is required to provide bank guarantees and other surety bonds as a condition of entering into contracts for new projects. The contractor had a $30 million facility with the Commonwealth Bank of Australia, which could be used to provide performance bonds. (This facility was later increased to $40 million.) The contract and security 1. In July 2022, the principal entered into two contracts with the contractor to deliver the Interstate Rail Terminal and rail access respectively for some $140 million. The contracts were relevantly the same and were administered together. Mr Barney was the principal's representative under both contracts. The principal was obliged to ensure that there was a Superintendent, who "shall act independently" in the performance of its roles and functions: clause 20. Peter Marshall of Rail Planning Services Pty Ltd was appointed as the Superintendent. 2. The contracts incorporated AS4000-1997 General conditions of contract. Relevantly, the contractor acknowledged that the work under the contracts (WUC) formed part of the obligations to be performed under the Development and Operations Deed, and that the principal was jointly and severally liable for the performance of obligations under that deed: clause 2.3. 3. The date for practical completion was defined in both contracts to mean 14 October 2023: clause 34.1(a); Item 7. Obviously enough, to complete the works by the Sunset Date under the Development and Operations Deed, the principal needed the contractor to achieve practical completion by that date. The date for practical completion could be extended as a consequence of extensions of time (EOT) directed by the Superintendent, allowed in any dispute resolution proceedings (under clause 42) or where there was any other alteration of the date for practical completion by operation of clause 32.3 (acceleration): clause 1 (definition of date for practical completion). 4. The contractor was obliged to provide security for 5% of the contract sum: clause 5.1; Item 13. In August 2022, the bank issued four unconditional undertakings to pay a total of $7,029,849 on demand by the principal. The circumstances in which the principal could have recourse to the security were set out in clause 5.2, to which I will return at [33]. 5. The contractor was obliged to proceed with WUC with due expedition and without delay: clause 32.1. Further, clause 32.1 relevantly provided: The Superintendent may direct in what order and at what time the various stages or portions of WUC shall be carried out. If the Contractor can reasonably comply with the direction, the Contractor shall do so. If the Contractor cannot reasonably comply, the Contractor shall give the Superintendent written notice of the reasons. If compliance with any such directions under this clause, except those pursuant to the Contractor's default, causes the Contractor to incur more or less cost than otherwise would have been incurred had the Contractor not been given the direction, the difference shall be assessed by the Superintendent and added to or deducted from the contract sum. 1. Clause 32.2 obliged the contractor to perform the WUC in accordance with an approved delivery program and provided that the contractor "must not, without reasonable cause, depart" from that program: clause 32.2. The supply of a revised approved delivery program for review, comment or approval (or failure to do so) by the Superintendent did not relieve the contractor from the obligation not to depart from an earlier approved delivery program: clause 32.2. 2. Aside from sequencing directions given by the Superintendent under clause 32.1, the Superintendent could also direct the contractor to accelerate the performance of WUC to reduce the time required to achieve practical completion by means of overtime, additional crews, additional shifts, re-sequencing of WUC or otherwise: clause 32.3. The Superintendent could accept the contractor's reasonable estimate of the extra costs it would incur in complying with the direction or the acceleration direction would be valued by a quantity surveyor under clause 36.4. 3. Clause 37 dealt with payment. In respect of unfixed plant and materials, clause 37.3 provided: 37.3 Unfixed plant and materials The Principal shall not be liable to pay for unfixed plant and materials unless they are listed in Item 29 and the Contractor: a) provides the additional security in Item 13(e); and b) satisfies the Superintendent that the subject plant and materials have been paid for, properly stored and protected, and labelled the property of the Principal. Upon payment to the Contractor and the release of any additional security in paragraph (a), the subject plant and materials shall be the unencumbered property of the Principal. 1. No items were specified in Item 29. As will be seen, the principal paid the contractor for some plant and materials and contends that the effect of the final paragraph of clause 37.3 is that these plant and materials are its property. 2. Clause 39 concerned default. According to clause 39.2, substantial breaches by the contractor included: e) substantial departure from an approved delivery program without reasonable cause or the Superintendent's approval; f) where there is no approved delivery program, failing to proceed with due expedition and without delay; … 1. In that event, the principal was entitled to issue a notice to show cause stating that it was a notice under clause 39 of the General Conditions of Contract, stating the alleged substantial breach and that the contractor was required to remedy or overcome that breach, and the date and time by which this must be done: clause 39.3 If the contract failed to remedy the breach, the principal was entitled, by written notice, to take the work out of the contractor's hands or terminate the contract: clause 39.4. In that event, clause 39.5 provided: 39.5 Completion The Principal may complete work taken out of the Contractor's hands or on termination and may without compensation to the Contractor: a) use materials, equipment and other things intended for WUC; … as are reasonably required by the Principal to facilitate completion of WUC or on termination of the Contract. The Principal may also: … d) direct the Contractor to novate to the Principal any agreement entered into by the Contractor with a subcontractor. … 1. Once work taken out of the contractor's hands was completed or after termination, the Superintendent would assess the cost or other loss or damage thereby incurred and certify as moneys due and payable the difference between that cost or other loss or damage, and the amount which would otherwise have been paid to the contractor if it had completed the work: clause 39.6. 2. The principal was also entitled at any time and for whatever reason, including its convenience, to terminate the contract and proceed to complete the WUC: clause 40A. In that event, the principal was obliged to pay the contractor various amounts up to a maximum of the unpaid portion of the contract sum and "subject to the Principal's right to have recourse to security, return any security then held by the Principal: clause 40A(e). 3. Clause 42 is a 'tiered' dispute resolution clause, the culmination of which is an arbitration, where the seat of the arbitration is Sydney. Consideration of contractual regime for security 1. It is convenient at this juncture to review the contractual provisions concerning security and the terms of the bank guarantees. As to whether a bank guarantee is intended to provide security or a 'risk allocation device', or both, the usual rules for construing commercial contracts apply; the Court should construe the terms of an instrument read as a whole. The question whether the underlying contract contains a qualification on the right to call upon the bank guarantee should be determined in light of the contract and the form of the bank guarantee: Daewoo at [10]. While the authorities provide guiding principles, the primary focus must be on the terms of the contract itself, not "reconsidering the questions of construction of the different contractual provisions in other decisions": CPB Contractors v JKC Australia [2017] WASCA 123 at [88]; quoted with approval in Kawasaki at [62]. 2. Like many contracts, the drafting here is imperfect; there appears to be a word missing from clause 5.2(a). Clause 5.2(a) is open to more than one construction. It is not my task to finally construe the clause but simply to inform myself to the extent necessary to decide whether it is appropriate to make an interim order under section 17J of the Commercial Arbitration Act 2010, or not. 3. Clause 5.1 of the contract obliged the contractor to provide security in accordance with Item 13 and as a precondition to any entitlement to receive payment under or in connection with the contract. Item 13 specified the form of the security, being two unconditional bank guarantees, each for an amount equal to 2.5% of the contract sum. 4. The Unconditional Undertakings were in like terms and relevantly provided that, at the request of the contractor and in consideration of the principal accepting the undertaking as security for the contract, the bank "unconditionally undertakes to pay on demand any sum or sums which may from time to time be demanded by the Principal to a maximum aggregate sum of" the particular undertaking (sum). The undertaking continues until notification by the principal that the sum is no longer required, the undertaking is returned, or until payment to the principal of the whole of the sum or such part as the principal requires. Further: Should the financial institution be notified in writing, purporting to be signed by an authorised representative for and on behalf of the Principal that the Principal desires payment to be made of the whole or any party or parts of the sum, it is unconditionally agreed that the financial institution will make the payment or payments to the Principal forthwith without reference to the Contractor and notwithstanding any notice given by the Contractor not to pay same. 1. Of central importance here, clause 5.2 provides: 5.2 Recourse The Principal may have recourse to the security …: a) to pay for or recover (as applicable) any costs, expenses or damage which the Principal … has incurred or (acting reasonably) claims to have incurred or might in the future incur as a consequence of any act or omission of the Contractor which the Principal (acting reasonably) asserts constitutes a breach of the Contract by the Contractor, including to pay for or recover any such costs, expenses or damage that are or incurred or might in the future be incurred due to termination of the Contract pursuant to clause 39.4b); … The Contractor undertakes to the Principal that the Contractor will not take any steps to injunct, prevent or restrain or seek to injunct, prevent or restrain: f) the Principal from having recourse to any security or otherwise exercising any [o]f its rights in respect of security under this clause 5; or g) the issuer of any security from providing recourse to security. 1. The contractor submitted that clause 5.2(a) required the satisfaction of three elements before the principal was entitled to have recourse to security. First, there must a breach, that is, an act or omission of the contractor that is asserted by the principal, acting reasonably, to constitute a breach of contract. This was said to have two further components: the fact of an act or omission of the contractor and an assertion by the principal, acting reasonably, that that act or omission constituted a breach of contract. Second, there must be costs, that is, the principal has in fact incurred, or acting reasonably claims that it has incurred or might in the future incur, costs, expenses or damage. Third, there must be causation, that is, the applicable costs, expenses or damages that the principal has incurred, or claims (acting reasonably) to have incurred or might in the future incur, arose as a consequence of the act or omission of the contractor asserted by the principal (acting reasonably) to constitute a breach of contract. In such an event, the principal may have recourse to the security, but only to pay or recover the actual, claimed or prospective costs, expenses or damage that enlivened the principal's entitlement to have recourse to the security. 2. The contractor submitted that this was not a 'risk allocation device'. Rather, clause 5.2(a) expressly limited the kinds of assertions or claims that could enliven a right to have recourse to the security by reference (in part) to an (objective) criterion of reasonableness. Clause 5.2(a) was very different to rights to have recourse to security (such as that considered in Daewoo) that are enlivened on the principal (subjectively) having a bona fide claim to money whether or not that claim is objectively reasonable. As such, the contractor submitted that the Court needed to consider whether there is a sufficient prima facie case raised by the contractor that the principal has no right of recourse to the Unconditional Undertakings under clause 5.2(a) such as to justify the continuation of the existing interlocutory restraints until any contrary order is made by an arbitral tribunal. That required an assessment of whether there was a prima facie case that the three elements of clause 5.2(a) were not presently satisfied. That in turn required consideration of whether there was a prima facie case that the assertions and claims made by the principal in seeking to enliven clause 5.2(a) were not assertions or claims acting reasonably. 3. The principal submitted that clause 5.2(a) operated as a 'risk allocation device'. The use of the phrase "any act or omission of the Contractor which the Principal (acting reasonably) asserts constitutes a breach" contemplates a right to call security at the early stage of a dispute. The text is inconsistent with a final determination of disputed rights being a pre-condition to a call on the security. The phrase "… or (acting reasonably) claims to have incurred or might in the future incur" confirms the intention that the bonds may be called early in the disputed claim process and in respect of loss that has not yet been incurred. It is not necessary that the loss be one that is more probable than not. Reasonable possibility suffices. The phrase "or might in the future be incurred due to termination of the Contract pursuant to clause 39.4b)" applies the same concepts to the context of termination. It makes express the intention of clause 5.2(a) to operate as a 'risk allocation device' in the context of a disputed claim of termination and related losses. The test was simply for losses that that the principal might incur. As long as there was a reasonable basis for the contention that the costs and expenses identified by the principal were of that character, that was the end of the matter. Conclusion 1. The contract required the contractor to provide security in the form of "unconditional" bank guarantees. The terms of the Unconditional Undertakings stated that the bank "unconditionally agreed" to make payment to the principal "forthwith without reference to the Contractor and notwithstanding any notice given by the Contractor not to pay same." It may be said that the "whole tenor" of the undertaking emphasises the proposition that "the intention of the parties to the contract was that [the contractor] was not entitled to raise the existence of a dispute as to whether it was in actual breach as an answer to an invocation of the guarantee and a claim under it": Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd (2008) 249 ALR 458; [2008] FCAFC 136 at [95] per French, Jacobson and Graham JJ. 2. Turning then to clause 5.2(a), it has several elements and may be utilised by the principal in a number of situations, including, but not limited to, in the event of termination of the contracts for substantial breach under clause 39.4(b). First, the principal may have recourse to the security where there are costs, expenses or damage, either incurred or anticipated. Where costs, expenses or damage have been incurred, the principal may have recourse to the security in order to pay these costs, or to reimburse itself after having done so. It is not necessary for the principal to have received a definitive account for such costs; it is sufficient that the principal "claims to have incurred" costs, as long as, in doing so, the principal is "acting reasonably". The principal may also have recourse to the security for costs, expenses or damage which it claims, "acting reasonably", that it "might in the future incur". That is, wherever the precise quantum of costs, expenses or damage is unknown, the principal must act reasonably in formulating the sum demanded from the bank. 3. The second element is that the costs, expenses or damage must be "incurred as a consequence of any act or omission of the Contractor". Clause 5.2(a) does not call for a definitive conclusion of causation, but rather that the principal claims, "acting reasonably", that the costs, expenses or damage were so caused. That this is so is confirmed by the principal's ability to have recourse to the security for costs, expenses or damages which it "might in the future incur"; it would not be possible to reach a definitive conclusion on causation in respect of future costs, expenses or damages which "might", but may not, occur. 4. The third element is that the principal, acting reasonably, asserts that the act or omission of the contractor – of which the costs, expenses or damage are a consequence – constitutes a breach of the contract by the contractor. Again, it is not necessary for the principal to definitively establish that the act or omission was a breach of the contract before having recourse to the security; it is simply necessary that the principal is acting reasonably when making that assertion. 5. That the principal may have recourse to the security for costs, expenses and damages which it "might in the future incur as a consequence of any act or omission of the Contractor which the Principal (acting reasonably) asserts constitutes a breach of the Contract" indicates that the principal can have recourse to the security at the stage of "claims" and "assertions" but before final adjudication. As to the requirement to be "acting reasonably", this qualification on recourse to the bank guarantee does not require that the principal's claim to be entitled to monies from the contractor is ultimately judged to be objectively valid; the condition allocates to the contractor the risk that such a claim might not ultimately be sustained against the contractor: Sugar Australia at [37]-[38] (Osborn and Ferguson JJA). That is, the imposition of a requirement that the principal be "acting reasonably" is an indicia that the clause is a 'risk allocation device'. A similar approach was taken by Kaye JA in Sugar Australia: at [142]. 6. Clause 5.2(f) and (g) also indicate that the contractual regime was intended to provide a 'risk allocation device'. In CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd (No 2), the Court considered that contractual limits on seeking an injunction restraining a party's recourse to the bank guarantee may shed light on the purpose of the right to recourse and confirm that the object of the contractual provision is to provide a 'risk allocation device' as to who was to be out of pocket pending the resolution of any dispute: at [93]. Even if such a clause is unenforceable as an ouster of the jurisdiction of the Court, it ought not be ignored in the process of construction as it may demonstrate the intention of the parties: CPB Contractors at [94]-[97]. 7. Having regard to the terms of the Unconditional Undertakings and the contractual provisions, I consider that the contractual regime is intended to provide a 'risk allocation device', establishing a 'pay now, argue later' regime where the principal is entitled to call on the guarantee at an early stage in the dispute, even if it turns out at the conclusion of an arbitral proceeding that the contractor was not in default; the contractor is the party to be 'out of pocket' pending resolution of the dispute. As such, "the status quo in such circumstances becomes what the parties have agreed as to which of them should bear the financial risk pending final determination, not the continuation of where that risk would naturally fall in the absence of a performance bond to call upon": Sugar Australia at [31]. These circumstances are distinguishable from those in Kawasaki, where the contractual regime did not so provide: at [98]. 8. The next question is whether the contractor has established that there is a serious issue to be tried as to the principal's right to have recourse to the Unconditional Undertakings. As will be seen, this issue is to be examined in circumstances where the principal has not, in fact, sought to have recourse to the security. Disputed extensions of time 1. The contractor commenced work in June 2022. The contractor submitted payment claims, claims for variations and proposed approved delivery programs. From August 2022 on, the contractor also made 35 claims for extension of time (EOT). By my calculations, the contractor claimed some 1,424 additional days and some $30 million in delay costs; the Superintendent allowed some 35 days and $1.23 million in delay costs. With the EOT approved by the Superintendent, the adjusted date for practical completion became 30 November 2023. 2. According to Mr Barney, between January and August 2023, there was significant slippage in the forecast dates for completion recorded in the monthly programs submitted by the contractor. In March 2023, the contractor's monthly program update showed a date for practical completion of 12 February 2024, being after the Sunset Date under the Development and Operations Deed. By May 2023, however, the contractor's monthly program update showed a date for practical completion of 26 June 2024. 3. On 12 May 2023, the principal engaged a planning and project delivery consultant to assist it to understand the delay and its causes and to seek to address the slippage in the contractor's progress and programmed completion date. On 16 May 2023, representatives of the contractor, the principal, the Superintendent and the consultant met at a 'kick off' meeting. 4. On 17 May 2023, the consultant submitted an EOT claim (EOT-34), being a compilation of EOT claims already submitted. The contractor complained that the Superintendent had not issued a revised approved delivery program, despite the contractor's requests. The Superintendent responded the same day, advising that the revised approved delivery program submitted failed to meet the requirements of the contract and required correction for review. 5. Representatives of the contractor, the principal, the Superintendent and the consultant attended a site inspection on 23 May 2023. A further meeting was held on 1 June 2023. On 2 June 2023, the contractor submitted a payment claim (PC12) for some $39 million. PC12 included claims for delay costs based on the EOTs claimed in EOT-34. 6. On 9 June 2023, the Superintendent issued a direction to the contractor to immediately commence the construction of pavements in the eastern terminal. In response, the contractor issued a variation claim, where it was said that the direction should have been given under clause 32.3 of the contract (that is, an acceleration direction). The pavement works were commenced on 26 June 2023. 7. On 14 June 2023, the Superintendent responded to the contractor's consolidated EOT claims, referring to the responses already given. The Superintendent noted that some of the claims were outside the timeframe required by the contract. Further, no additional particulars had been provided which warranted a different response from that already given. The Superintendent's position remained unaltered. 8. On 19 June 2023, the Superintendent issued a payment schedule in respect of PC12 for a total of some $11 million, but rejected the delay costs based on EOT-34. On 20 June 2023, the contractor sent a text message "unfortunately on the back of the EOT and now Payment Schedule we won't be engaging further with [the consultant]". 9. On 30 June 2023, the contractor submitted an adjudication application in respect of PC12. On 18 July 2023, the contractor issued a letter of dispute under each of the contracts, disputing the Superintendent's rejection of EOT-34, including on the basis that the Superintendent had failed to act independently. 10. The Superintendent began to issue directions to the contractor to commence various preliminary elements of the outstanding track work installation. On 28 July 2023, the Superintendent issued a direction to commence the supply and placement of bottom ballast. Adjudication determinations 1. On 1 and 2 August 2023, an adjudicator issued determinations in respect of PC12, with adjudicated amounts totalling some $11 million. The adjudicator observed that the EOT claims were "largely undefended". Overall, the adjudicator determined that the contractor was entitled to EOTs of 128.5 days arising from EOT-34 and delay costs of $6.425 million. If those EOTs were added to the then extant date for practical completion, the resultant date for practical completion would have been 4 June 2024. 2. On 4 August 2023, the contractor advised that the direction to commence the supply and replacement of bottom ballast was considered to be a direction to accelerate under clause 32.3. Further, compliance with the direction was said to bring about the requirement for the site to become a 'rail site' under the Rail Safety National Law earlier than planned, which required the implementation of additional safety controls, the costs of which were then set out. The contractor sought confirmation from the Superintendent that they wished to proceed with an acceleration direction as a variation order. The Superintendent immediately replied that the direction was only in relation to the supply and placement of bottom ballast and did not invoke the Rail Safety National Law as no railway was directed to be installed. The Superintendent confirmed that its direction remained unaltered. 3. According to the contractor's letter of 9 August 2023, "robust discussion" took place in a commercial meeting that day in respect of the Superintendent's directions. The contractor reminded the Superintendent of the adjudicator's determination of 2 August 2023, approving an EOT where the date for practical completion was now early June 2024. This determination was said to confirm the contractor's current approved delivery program to be accurate, with any deviation from that program to be "an obvious acceleration direction and ultimately a variation". 4. On 14 August 2023, the Superintendent issued a direction to the contractor to commence the pre-building of turnouts by 28 August 2023. (As I understood it, a turnout is a track configuration that enables trains to move from one track to another.) A workshop was held on 15 August 2023 to discuss the Superintendent's directions. The contractor required the principal's representative to leave the meeting. Mr Barney wrote on 16 August 2023, complaining that ejecting the principal's representative was unreasonable and contrary to any collaborative approach to resolving the way forward for the contractor to comply with the Superintendent's directions. An explanation was sought. Mr Barney also noted: We further understand that the Contractor was asked whether this work could be achieved if the Contract was issued with an acceleration instruction and Contractor indicated that it could. 1. Where the contractor could apparently comply with the direction but would not do so unless there was an acceleration direction, and where the track works were said to be on the "critical path" and the supply and placement of bottom ballast could be performed now, the principal expressed the view that the contractor's refusal to comply with the direction was a substantial breach of contract. Confirmation was sought as to whether the contractor would or not comply with the direction. 2. On 16 August 2023, the principal also wrote to the contractor and the Superintendent in relation to the Superintendent's recent directions, noting that such directions did not require a separate acceleration instruction or variation instruction. The contractor's responses to the directions was said to not pass scrutiny. Further, "the Principal is concerned that the Contractor seems to be embarked on a deliberate strategy of grossly exaggerating project delays and disruption and cost impacts. Part of that strategy demonstrated through the Contractor's more recent unapproved programs, seems to be a deliberate slowing down and prolonging of the work to be delivered …". 3. On 18 August 2023, the principal wrote again, noting that the last approved revision to the approved delivery program was in September 2022. The Superintendent had not approved the contractor's proposed revisions to the program as each of the revised programs submitted were said not to have complied with the requirements of the contract and were inconsistent with the actual progress of works. Accordingly, the approved delivery program remained that approved in September 2022. Whilst the contractor was said to have been asserting that "whatever its revised monthly program is, that is the approved delivery program under the contract", that was said to be clearly incorrect. Deviation from the approved delivery program without reasonable cause was a substantial breach of the contract. The contractor was asked to remedy this matter. 4. On 23 August 2023, the parties participated in a commercial meeting. It would appear from the notes of the meeting that relations between the contractor and the Superintendent had deteriorated. The contractor's representative stated at various times that he did not give a "fuck" about what the Superintendent thought and would be disregarding directions. The contractor threatened to demobilise from the site on 25 August 2023 unless its costs were approved. The principal was said to be "a fucking liar". The Superintendent issued a direction to the contractor to have the representative removed from site on the basis that he was not competent to perform the role and functions of commercial manager for the project. The contractor initially declined to remove its representative from the project but ultimately did so, advising that it would fully support him in any personal action he may take against the Superintendent or the principal. 5. By 28 August 2023, the contractor had commenced pre-building only two turnouts. Notices to show cause 1. On 28 and 29 August 2023, the principal issued notices to show cause to the contractor under clause 39.2, citing substantial departure from the approved delivery program, failing to proceed with due expedition and without delay and failing to comply with the Superintendent's directions. The notices to show cause referred to earlier correspondence and relied on and repeated the matters raised in the principal's letter of 18 August 2023. The contractor was said to have taken inadequate action to remedy these matters and was required to remedy the substantial breach by 11 September 2023. 2. On 4 September 2023, the contractor issued payment claims under the contracts (PC14), seeking payment of some $27.2 million. 3. On 7 September 2023, the parties participated in a without prejudice attempt to resolve the issues in dispute. The conference was unsuccessful. 4. On 8 September 2023, the contractor responded to the show cause notices. The contractor complained inter alia that the show cause notices did not identify the clauses in the contract said to have been breached, nor provide the particulars of any alleged breach, nor how any such breach was said to be a substantial breach so as to enliven clause 39.2 of the contract. 5. On 12 September 2023, the contractor proposed that an executive negotiation take place in accordance with clause 42.5 of the contract. On 13 September 2023, the principal proposed that the negotiations take place with an independent mediator on 27 September 2023. (This appears to have been overtaken by events.) In parallel, the contractor continued to complain that the Superintendent lacked independence. On 14 September 2023, the principal advised that Rail Planning Services had replaced Mr Marshall with Miff Story. On 18 September 2023, the new Superintendent issued payment schedules in respect of the PC14 payment claims, such that sums were owed to the principal. (On 2 November 2023, an adjudicator issued determinations in respect of progress claims PC14, determining that some $4.6 million to the contractor.) 6. Mr Barney considered that the responses to the notices for show cause provided insufficient justification for the alleged breaches notices and made no satisfactory attempt to remedy or overcome issues raised by the principal. Mr Barney took the view that the contractor had not, and was not going to, satisfactorily remedy the issues which the principal considered were substantial breaches of the contract. He formed the view that the contractor was not seeking to progress the works expeditiously but was adopting a commercial strategy resulting in continual delay to, and slippage in, the program in the hopes that the principal would pay it additional amounts to complete the WUC given the risks to the principal of the Sunset Date. 7. On 21 September 2023, the Superintendent and Mr Barney provided an early works letter to Vaughan Civil Pty Ltd. On 22 September 2023, the principal provided Vaughan Civil with a draft construction contract for the Interstate Terminal and Rail Access Work. Termination of contracts 1. On 25 September 2023, the contractor commenced these proceedings ex parte. Ball J restrained the principal until return of the summons from notifying the bank that it desired payment for part or all of the sums referred to in the unconditional undertakings. By consent on 27 September 2023, Ball J made orders continuing the interim regime and timetabling the proceedings. 2. On 25 September 2023, notices of termination were served on the contractor, both for cause and for convenience. The principal complained of "significant unexplained slippage, month on month, in the Contractor's unapproved programs" from February 2023, together with changes in the sequencing and logic underpinning the programs. This was said to have artificially prolonged the reported date for completion of the contractor's works. While the principal accepted that there had been delays for which the contractor was entitled to an EOT for inclement weather and access issues, the contractor had already been granted extensions of time for these matters. This did not account, however, for an extension of almost 9 months sought on a 14 month program of works, being some 65% of the original contract duration. 3. Where the contractor was aware that the principal had upstream obligations to deliver the works by the end of January 2024, and where the contractor had communicated its understanding of that matter on a number of occasions, including when making demands for acceleration instructions, the principal considered that the contractor had been "artificially inflating delay impacts to its program and seeking to use that and the Principal's upstream delivery obligations as commercial leverage to extract acceleration instructions and payment." The contractor's response to the Superintendent's directions was said to be without a proper basis. The contractor was put on notice that, in accordance with clause 35(d), it would be required to novate a number of agreements with subcontractors and suppliers to the principal. 4. On 26 September 2023, the contractor issued termination notices to the principal, on the basis that the principal had repudiated the contracts by its notices of termination for cause and for convenience. (The contractor now accepts that the notices of termination for convenience were effective to terminate the contracts but maintains that the preceding notices of termination for cause were invalid.) Novation and new subcontracts 1. On 28 September 2023, the principal issued directions to the contractor, directing it to novate any subcontract or agreements to the principal pursuant to clause 39.5(d) of each contract. The contractor immediately disputed that it had received a direction requiring novation of any subcontracts. Nor was there said to be any contractual obligation to novate any subcontract. (In these proceedings, the contractor contended that it had no obligation to do so because the principal did not validly terminate the contracts for cause and thus clause 39.5 was not engaged). The principal was invited, however, to identify agreements which it sought to have novated, for the contractor's consideration. The contractor also maintained that the Superintendent was not entitled to direct that any items ordered by the contractor under a subcontract to be delivered to the project or marked as belonging to the principal "in circumstances where the items have not been paid for and accepted by [the principal] under the terminated Contracts." 2. Mr Barney said that, as a result of the termination of the contracts and the contractor's refusal to novate its agreements with subcontractors and suppliers, the principal entered into letters of intent with Vaughan Civil and Mainland Civil in order to ensure that the works on the project are continuing. On 30 September 2023, the principal entered into a deed of agreement with Vaughan Civil in respect of the Interstate Terminal and Rail Access Works. The Principal has sent letters of intent to new contractors, Mainland Civil Pty Ltd and John Holland Pty Ltd, to complete the remaining WUC. 3. On 3 October 2023, the principal sent the contractor a further direction to novate the agreements with subcontractors. On 4 October 2023, the contractor responded, asserting that it had no obligation to comply with the direction. On 6 October 2023, the contractor wrote to a number of the subcontractors stating that the contractor was suspending the carrying out of the subcontractor works and advised the subcontractors not to order any further materials in connection with the project. 4. The principal expects to pay John Holland some $2.6 million to attend to various tasks which it would not have been necessary to do if the contracts had remained on foot. These expenses include the preparation of management plans, a dilapidation inspection, and audit of materials, site establishment, mobilisation of equipment, the procurement of 11 frogs (in order to replace the 25 frogs which are now missing from the site: see [82]-[84]). The principal expects to incur some $1.2 million in demobilisation and remobilisation costs, together with the mobilisation costs of John Holland Rail. These costs relate to additional site security, contract development and the need to procure a further 14 frogs. 5. Mr Barney expects that the principal will incur further costs and expenses of some $2.8 million, being moneys owing to Vaughan Civil under its subcontract with the contractor. The principal has agreed to pay these sums to Vaughan Civil to continue works on the site, subject to refund if payment is received from the contractor. Similarly, the principal has agreed to pay some $3.1 million owing to Mainland Civil under its subcontract, subject to refund if payment is received from the contractor. A further $150,000 is expected to be paid to Integral Surveys for moneys owing under its subcontract and not yet paid by the contractor. Notice of dispute 1. On 9 October 2023, the contractor sent a letter of dispute to the principal under clause 42.3(a), seeking the return of security. In short, it was said that the principal was not entitled to terminate the contracts for cause and thereby repudiated the contract. The contractor accepted that repudiation and thereby terminated the contract. It was said that the principal did not have a right of recourse to the security prior to the contractor's termination of the contract. In these circumstances, the contractor claimed to be entitled to the immediate return of the security. In respect of the principal's termination for convenience, it was said that the principal was required to return the security at that time. Absent voluntary return of the security, the contractor sought relief compelling return of the security and restraining recourse to it in the meantime. 2. Following completion of the initial steps in the dispute resolution process, if the dispute remains unresolved then the parties will be entitled to apply for the dispute to be referred to arbitration by 5 January 2024. Missing supplies 1. Mr Barney outlined construction materials which the principal has paid for but which have not been delivered to site and thus the principal will be required to independently procure again as a result of the termination of the contracts and the contractor's ongoing failure to deliver the construction materials. These items total some $3 million. 2. Amongst this material were turnouts. Before the contracts were executed, in April 2022, the principal placed a purchase requisition with the contractor for a number of long lead-time materials totalling some $19.4 million. Relevantly, the purchase requisition included turnouts. In June 2022, the contractor provided bank guarantees totalling $2.208 million as security for the advance payment for purchase of the turnouts. From June 2022 to March 2023, the principal made payments to the contractor for the turnouts, totalling some $2.25 million: see [82]. (In February 2023, at the contractor's request, the principal returned the bank guarantees and likely now regrets having done so.) 3. On 17 October 2023, the principal wrote to the contractor following completion of an inventory audit of construction materials on site. In particular, the principal was concerned that "frogs" (which are a mechanical structure that enables train wheels to cross from one track on to another) for all unassembled turnouts which had been delivered to site and paid for by the principal, but were no longer on site. The frogs had been photographed on site on 25 July 2023 but, by 7 September 2023 were no longer there. Frogs similar to the ones stored on site had been photographed in the contractor's yard in Wollongong on 19 September 2023. The Principal requested that the frogs and all other turnout components be returned to the principal's site by 19 October 2023. This has not occurred. (In these proceedings, the contractor admitted that it had removed the frogs from site and refused to give custody to the principal.) 4. One of the contractor's suppliers was Aldridge Signal Infrastructure Pty Ltd. In July 2023, the principal partially paid for and certified materials supplied by this company. These were referred to as "free issue materials", where the principal paid a third party and then provided the material to the contractor. The supplier was a related company to Martinus Rail: on 28 August 2023, Mr Martinus incorporated a company called Aldridge Investments Pty Ltd; on 1 September 2023, Aldridge Investments became sole shareholder of Aldridge Signal Infrastructure and Mr Martinus became sole director. The principal and Superintendent had been engaged with Aldridge Signal Infrastructure in respect of the construction material which it then held. 5. On 20 October 2023, Aldridge Signal Infrastructure wrote to the principal, requesting $4,279,385.79 in exchange for ownership of the materials. This was said to be on the basis that the contractor required Aldridge Signal Infrastructure to repay the amounts it had paid for these construction materials prior to them being returned to the principal. On 25 October 2023, the principal wrote to the contractor in relation to these materials, requiring delivery of the materials by 27 October 2023. This did not occur. 6. On 4 December 2023, Aldridge Signal Infrastructure wrote to the principal, advising that it proposed to deliver the principal's property on 6 December 2023. On 6 December 2023, it appears that there were some problems arranging delivery; the Superintendent advised that the principal did not agree to Aldridge Signal Infrastructure's proposal. The supplier proposed to deliver the materials on 12 December 2023 instead. The principal then advised that, on receipt of the materials, it would attempt to cancel its re-order of the materials to minimise the cost consequence to the contractor and the supplier and would otherwise claim any such costs from both parties. Where the hearing took place on 11 December 2023, it is not known whether the materials were returned. Relevance of adjudication determination 1. The contractor submitted that there is a serious question as to whether, in light of section 34 of the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA), the principal was entitled to have recourse to the Unconditional Undertakings and thereby reverse the consequences of the adjudication determination in the contractor's favour. The contractor submitted that the principal's main complaint of slippage in the forecast date of practical completion could not enliven clause 5.2(a) by reason of its inconsistency with the operation of section 34 of SOPA, which added 128.5 days to the principal's asserted date for practical completion. If that were not so, it would be possible by contractual provision to replace the 'pay now, argue later' regime of SOPA with a regime that permitted an unsuccessful party to recover an amount paid under a SOPA determination by mere assertion and without establishing an entitlement inconsistent with the determination: Grocon v Construction Profile [2020] NSWSC 409 at [32] (per Ball J). 2. The contractor submitted that the effect of SOPA was that the adjudication determination settled the issue unless and until decided otherwise on a final basis, including by arbitration. The contractor accepted that John Holland v RTA [2007] NSWCA 140 at [56] and [62] might suggest otherwise, but submitted this decision was distinguishable, where the case at hand concerned whether security can be retained. Recourse to security was apt to undo the adjudicator's determination. The observations of White J in Patterson Building Group Pty Ltd v Holroyd City Council [2013] NSWSC 1484 at [75], [77] to the contrary were said to be obiter. Nor did Besanko J's observations in Fabtech Australia v Lang O'Rourke [2015] FCA 1371 at [38] stand in the way of the contractor's argument, nor Acciona Infrastructure Projects Australia Pty Ltd v EnerMech Pty Ltd [2023] NSWSC 1565 (handed down whilst judgment was reserved). 3. The principal submitted that the contractor's SOPA argument was novel and went considerably further than existing authority. The specific focus of SOPA was to provide progress payments for construction work: s 3(1). The legislation had nothing to do with other rights that might arise under construction contracts, including the principal's rights in connection with breach. The rights which the principal sought to vindicate and exercise were contractual rights that section 32 expressly stated it did not intend to affect. Nor did the right to have recourse to security seek to modify the operation of the statute: section 34(2)(a). The principal did not seek to unwind the payments made in accordance with the adjudication determination. The application was concerned with a fundamentally different issue, being the principal's losses for breach. Nothing in SOPA touched on that subject, nor was there anything in the way that the principal was exercising its rights which intersected with the statutory right to progress payments. An adjudication determination does not give rise to issue estoppel even as against other adjudication determinations save in limited circumstances: Dualcorp Pty Ltd v Remo Constructions Pty Ltd (2009) 74 NSWLR 190; [2009] NSWCA 69; per Macfarlan J at [60]; Harlech Enterprises Pty Ltd v Beno Excavations Pty Ltd [2022] ACTCA 42 at [26]-[36] (per Kennett J); [74]-[75] (per Lee J). The only sense in which SOPA is regarded as a 'risk allocation device' is to allocate the risk of solvency of the builder onto the principal. The statute had no operation in relation to other forms of contractual risk allocation such as the one found in clause 5.2. The Court should simply proceed to apply the contractual text. 4. The principal submitted that the fact that it asserted a breach at odds with what the adjudicator had determined did not mean that the principal's assertions were unreasonable. In the adjudication system, decisions were made in truncated timeframes in a rough and ready process by people who were not legally qualified making decisions on legal questions. Whatever the adjudicator had determined, the contractual position was that the date for practical completion was 30 November 2023. The principal was entitled to advance claims on the basis of the prevailing contractual position; it acted reasonably in advancing such claims. The fact that the adjudicator approved EOTs did not have the consequence that it was unreasonable for the Superintendent to form a different view, and it is clear that the Superintendent did form a different view: section 32. The position being advanced by the principal was coherent and had a reasonable basis. There were no facts advanced by the contractor which indicated that the claims were unreasonable. 5. Part 3 of SOPA sets out the procedure for recovering progress payments, then noting in section 32: 32 Effect of Part on civil proceedings (1) Subject to section 34, nothing in this Part affects any right that a party to a construction contract— (a) may have under the contract … 1. Part 4 of SOPA sets out various miscellaneous provisions, including section 34, which provides: 34 No contracting out (1) The provisions of this Act have effect despite any provision to the contrary in any contract. (2) A provision of any agreement (whether in writing or not)— (a) under which the operation of this Act is, or is purported to be, excluded, modified or restricted (or that has the effect of excluding, modifying or restricting the operation of this Act), or (b) that may reasonably be construed as an attempt to deter a person from taking action under this Act, is void. 1. The intersection between an adjudication determination and a contractual right to have recourse to security have been considered in a number of cases. John Holland Pty Ltd v Road and Traffic Authority of New South Wales [2007] NSWCA 140 considered a similar position to that at hand. The contractor had the benefit of an adjudication determination in its favour, which the principal paid. The principal had not called on the security but declined to return it. The contractor argued that, if the contract operated so as to permit retention of the security, it was void by reason of section 34. Giles JA (Tobias and McColl JJA agreeing) rejected this submission, "It is not correct that retention of security "undoes" an adjudicator's determination, or that a superintendent who in performing his contractual function comes to a determination negates a statutory right to retain an adjudicated amount. The adjudicator's determination remains, and brings payment of the adjudicated amount, but that is interim and subject to a different position being established … contractually or in proceedings. If in civil proceedings it is decided that the contractor was entitled to [a different sum], that does not undo the adjudicator's determination. It has done its work in ensuring "prompt interim progress payment on account, pending final determination of all disputes" … [Similarly] if the final determination involves the superintendent determining that the contractor was entitled to [a different sum] … than [that] determined by the adjudicator, the superintendent is not negating the contractor's statutory right": at [62]. Further, at [63]: Section 34 of the Act requires that the contractual provision exclude, modify or restrict, or have the effect of excluding, modifying or restricting, "the operation of this Act". The Act operated to require that the RTA pay the adjudicated amounts to John Holland, and it did so. … There is no effect contrary to that operation of the Act if, in the final determination of the position between the parties, one party has to pay money to the other because the final arbiter takes a different view from that of the adjudicator. Section 32 of the Act preserves the final determination, by the contractual mechanism or by proceedings. Nor is there an effect contrary to that operation of the Act if security provided under the contract is retained, the contract on its proper construction and operation so permitting, to satisfy John Holland's obligation to pay money to the RTA if that is the outcome of the final determination. 1. In Patterson Building Group Pty Ltd v Holroyd City Council [2013] NSWSC 1484, White J dealt with an application to restrain the principal from calling on a bank guarantee. The contractor had an adjudication determination in its favour for some $470,000, which was paid. The contractor had submitted a further progress payment, which the superintendent assessed at $nil. The superintendent issued a notice asserting that the contractor owed moneys to the principal, including liquidated damages. Obiter, White J acknowledged that the facts differed from those in John Holland v RTA, but nonetheless the reasoning continued to apply, "I think it would be straining the operation of s 34 to find that it rendered void or required the reading down" of the contractual regime, which involved (as here) a 'risk allocation device': at [75]. Further, at [73]: The position can also be tested by considering what the position would have been if, for example, the [principal] had recourse to the security to meet its claim to be owed money on account of liquidated damages before there was a reference to adjudication. There would be nothing I think in the Act that could preclude the [principal] from having recourse to the security in those circumstances and it does not appear to me that the [contractor] could undo the effect of the [principal's] having recourse to the security by recourse to the procedures in the Act. 1. Patterson Building was followed in Fabtech Australia Pty Ltd v Laing O'Rourke Australia Construction Pty Ltd [2015] FCA 1371, where a contractor argued that the policy of the Act was that it was entitled to retain the amount paid following an adjudication determination until there was a decision of a court or tribunal to the contrary; permitting the principal to call on a bank guarantee was said to undermine the whole process under the Act. Besanko J disagreed at [38]: … The difficulty for the [contractor] is to extract from the Act an "effect" which prevents enforcement of the Bank Guarantees. The [contractor] does not argue that the [principal] cannot pursue its claims by way of proceedings in court or by way of arbitration and presumably, could not have recourse to the Bank Guarantees if it is successful. For what period then is the [contractor] to be precluded from enforcing the guarantees? On what basis is one to infer that the [contractor] is to enjoy the fruits of the adjudicator's decision until a court or arbitrator decides to the contrary? The fact that the Act provides no answer to these questions means, I think, that recourse to the Bank Guarantees does not have the effect of excluding, modifying, restricting or otherwise changing the effect of a provision of the Act. Once the payment pursuant to the adjudicator's decision is made, the Act ceases to have any effect on events thereafter and the [principal's] rights under the Subcontract Agreement are expressly preserved by … the Act. 1. Which brings us to the case relied upon by the plaintiff, being Grocon (Belgrave St) Developer Pty Ltd v Construction Profile Pty Ltd [2020] NSWSC 409. In that case, the principal issued a tax invoice for liquidated damages. An adjudicator determined that the contractor was entitled to be paid some $1.2 million, assessing the claim for liquidated damages at $nil. The principal called on bank guarantees in payment of liquidated damages, and then paid the adjudicated amount. The contractor did not challenge the principal's right to call on the bank guarantees but served a further payment claim including an amount to cover the sums paid. His Honour concluded that the payment claim did not fall within the scope of the Act: at [23]. Obiter, Ball J went on to consider section 34 of the Act and its interaction with the ability for a principal to call on a bank guarantee. 2. His Honour expressed doubt in respect of White J's comments in Patterson Building (at [73]) concerning the ability to have recourse to security to pay liquidated damages at [32]: … it is not clear why an adjudicator could not make an adjustment in his or her determination to take account of amounts recovered by the principal as a consequence of an exercise of a right to call on a guarantee. Earlier, commenting on the obligation under the contract to provide security, White J said (at [39]): Contrary to the submissions of counsel for the plaintiff this clause does not merely provide security to the defendant for amounts that might be found to be due to it. The clause is a risk allocation device that addresses the issue of who is to be out of pocket while the dispute under the contract is determined … But the Act also provides a risk allocation device that addresses the issue of who is to be out of pocket while the dispute under the contract is determined. To the extent that the contract provides a different answer to that question than the one provided by the Act it is difficult to see why the contract is not rendered void by s 34. 1. I accept, as stated in Grocon, that it may be appropriate for an adjudicator to consider amounts paid under a bank guarantee. It does not follow from that proposition that, where payment under a bank guarantee is sought subsequent to a determination, exercise of that right contravenes section 34 of the Act. Rather, the Act has operated in accordance with its terms prior to the exercise of those rights, as explained in John Holland v RTA. 2. As much is confirmed in Acciona Infrastructure Projects Australia Pty Ltd v EnerMech Pty Ltd [2023] NSWSC 1565, which was delivered whilst this judgment was reserved. The facts were not dissimilar to Grocon. A contractor had two adjudication determinations in its favour totalling some $16 million, which the principal paid. The principal called on an Unconditional Undertaking for some $7 million, being the amount, which the principal's representative assessed, under the contract, that the contractor had been overpaid. The contractor relied on Grocon in support of the argument that the contractual provisions permitting the principal to certify amounts due against amounts payable to the contractor was rendered void by section 34 of the Act. Stevenson J observed of Ball J's obiter, at [123]: Ball J was here speaking of what adjustment an adjudicator might be entitled to make in a determination in circumstances where the principal had recourse to the security before reference to an adjudication. 1. The contractor in Acciona also submitted that the contractual provisions were void to the extent of authorising a call by the principal on the security in respect of claims that had already been rejected by a determination under SOPA. Stevenson J concluded that the contractual provisions could not be seen to exclude, modify or restrict the operation of SOPA. Following John Holland and Fabtech, his Honour held at [148]-[150]: Acciona has exercised a contractual right under the Contract to make the Demand for the Security Amount. On the assumed facts [that breaches had occurred], Acciona was entitled to exercise that contractual right. Acciona's exercise of that contractual right gave it a further right, independent of the Contract, against a third party, HSBC, to call on the Security. There is no question as to the existence and enforceability of that further right. Nor is there any question or suggestion that the Act could have any operation so as retrospectively to render ineffective Acciona's exercise of its right or relieve HSBC of its concomitant obligation to honour that right. The First and Second Determinations stand, and Acciona has complied with them. The Act has thus "operated" in accordance with its terms. It is true that following the making of the Demand and the payment to Acciona by HSBC of the Security Amount, the effect of those Determinations has, as a practical matter, been reversed. But that is a result of events occurring subsequent to the orderly operation of the Act, and in accordance with the Contract. It is not a result of any modification, or restriction, on the operation of the Act. 1. It is clear that, if the principal had drawn on the bank guarantee, then there is no reason why that could not be considered in a subsequent adjudication determination by virtue of section 34 of the Act. Equally, an adjudication determination does not stand in the way of the principal exercising contractual rights by virtue of section 32 of the Act. Accordingly, the adjudication determination in the contractor's favour in this case has no bearing on this application, nor does it stand in the way of the principal making a demand on the security so long as it satisfies the qualifications contained in clause 5.2(a). Acting reasonably 1. The next question is whether the contractor has established that there is a serious issue to be tried as to the principal's right to have recourse to the Unconditional Undertakings. The contractor submitted that there was a serious question to be tried as to whether the principal's claim as to the costs, expenses or damage it incurred by reason of termination was reasonably made. If the principal had validly terminated the contracts under clause 39.4, the sum to which the principal would be entitled was an amount certified by the Superintendent under clause 39.6. That is the difference between the cost to the principal of completing the remaining works and the amount that would otherwise have been paid to the contractor to complete those works. The amounts claimed by the principal consequential upon its alleged termination addressed only the first part of that equation; the principal had made no attempt to allow for the costs savings to the principal in respect of the amounts it would otherwise have been required to pay to the contractor. 2. The contractor submitted that the principal's various assertions of breach were not tethered to any particular acts or omissions of the contractor and thus failed to meet the requirements of clause 5.2(a): see [34]. The principal's claim that the contracts were terminated for cause was not made acting reasonably and not available in light of the adjudication determination and section 34 of SOPA. Where the principal proceeded to terminate for convenience, that obliged the principal to return the Unconditional Undertakings to the contractor: clause 40A(e). The principal's decision to terminate for convenience was also said to sever any causal link that may otherwise have existed between the contractor's acts or omissions and the costs and expenses incurred as a result of its termination of the contracts. Such costs expenses or damage did not arise in consequence of any asserted breach of the contracts such as to enliven the principal's right of recourse under clause 5.2(a) but arose as a consequence of the principal's own decision to terminate the contracts for its convenience. 3. As to alleged failure to provide and obtain approval for revised approved delivery programs, the contractor submitted that clause 32.2 did not impose an obligation on the contractor to obtain approval. The principal's assertion that the contractor breached a non-existent obligation could not be described acting reasonably. 4. As to alleged failure to comply with directions of Superintendent, the contractor submitted that it was only obliged to comply with a direction as to what order and at what time the various stages or portions of WUC shall be carried out if the contractor could reasonably comply with that direction. As the contractor explained in its response to each of those directions, it could not reasonably comply with the directions. It was said to be unreasonable for the principal to assert to the contrary. Such an assertion was also inconsistent with the adjudication determination. As such, these assertions of breach did not enliven the principal's right of recourse under clause 5.2(a). 5. As to the asserted breach by failure to novate subcontracts, the contractor submitted that on a proper construction of clause 39.5(d), no direction could be made unless the principal had validly terminated the contracts under clause 39.4. The costs, expenses and damage which the principal claimed to have incurred as a result were not advanced reasonably, where the principal was seeking to engage with these subcontractors even before the direction was issued. 6. As to the asserted breaches by failure to deliver construction materials, the contractor submitted that the implied duty to cooperate did not extend so far, nor was clause 39.5(a) engage where the principal did not validly terminate the contract. Part payments made to the contractor on account of WUC were not divisible in such a manner. Nor did the principal have title to the materials, apart from the "free issue materials" supplied by Aldridge Signal Infrastructure, which the supplier had been endeavouring to deliver. The principal's costs, expenses and damages were said to be overstated and would not justify any recourse to the entirety of the Unconditional Undertakings, for example, the replacement costs of the 'frogs'. 7. The principal submitted that clause 5.2(a) requires the existence of an asserted breach and a claimed loss in order to convert security. The only qualification imposed by the contracts is that the claimant must be "acting reasonably" in making the assertion. It is the conduct of the principal in making the assertion that clause 5.2(a) requires be reasonable: Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [2015] VSCA 98 at [142] by Kaye JA (Osborn and Ferguson JJA agreeing at [69]). The contractor does not point to any conduct of the principal alleged to comprise unreasonable acts in connection with each asserted breach. As such, there was no strong or serious prima facie case on the contractual issue. The mere existence of some controversy about the asserted breaches does not render the principal's conduct unreasonable: Sugar at [171]. Nor it is necessary for the Court to descend to the detail of the substantive disputed matters of fact and law that arise in connection with the underlying breaches. 8. The principal submitted that, where it had paid for the plant and materials, the effect of clause 37.3 was that the plant and materials were the unencumbered property of the principal. At the very least, the principal had a reasonably made claim that the materials were its unencumbered property, that there had been a breach of an implied obligation to provide access to its property on termination and that the implied obligation applied even in the event of termination for convenience. 9. This issue is to be examined in circumstances where the principal has not, in fact, sought to have recourse to the security. As White J described it in Patterson Building Group, where the principal had not made a claim on the bank guarantees, the contractor "has the onus of proving a negative, that is, … that there are no circumstances in which the [principal] could have recourse to that security": at [35]. 10. The fact that a performance bond is intended to operate as a 'risk allocation device' is not necessarily determinative of the right of a party to have recourse to it; it may be subject to a contractual qualification or limitation upon the circumstances in which recourse may be had: Sugar Australia at [25]. Here, the qualification on recourse to security is that the principal is "acting reasonably". The content of this qualification was explained by Kaye JA in Sugar Australia at [144]: [The clause] required that the [principal], at the time it made the claim, then be acting reasonably, in an objective sense, based on the information and facts then known, or which reasonably ought to have been known, to the [principal] at that time. However, … at the same time, [the clause] did not require the [principal] to have such knowledge that would decisively establish its entitlement to payment, indemnity or reimbursement of the monies claimed in the recourse notice. Rather, the clause required no more than that the [principal] have acted reasonably in making the claim, based on the facts and circumstances, which it knew, or ought to have known, concerning the validity of that claim. 1. The existence of a controversy is not sufficient, on its own, to demonstrate that the principal was not acting reasonably; the clause was intended to allocate the risk to the contractor, as the party who would be out of pocket, in the event of such a controversy arising under the contract: Sugar Australia at [171]. 2. The contractor took a 'kitchen sink' approach to identifying serious issues to be tried, including some novel propositions unsupported by authority. But beyond tendering the correspondence which passed between the parties once they fell into dispute, there was little evidence advanced to discharge the onus. The contractor's solicitor, Mr Stulic gave a broad overview of the project and the contractual regime. He exhibited the relevant correspondence, highlighting pertinent passages on information and belief from the contractor's general counsel, Patrick Hayburn. Beyond this, Mr Stulic gave evidence on information and belief on matters going to the balance of convenience. 3. For the principal, Mr Barney set out the background and context of the contract, including the principal's obligations under the Development and Operations Deed and the concerns which developed as the contractor's EOT claims and projected completion date extended beyond the Sunset Date. Mr Barney set out the steps taken by the Superintendent to address these concerns, including retaining the consultant and the contractor's withdrawal from engagement with that consultant. The reasons underlying the Superintendent's directions were explained, as well as his assessment of the contractor's responses to the show cause notices. Mr Barney's concerns about the contractor's unwillingness to take direction from the Superintendent were described, both of which led him to form the view that there were substantial breaches of the contracts, leading to the notices of termination. Mr Barney went into some detail about the steps taken by the principal and Superintendent thereafter to engage new contractors to complete the works, and the costs associated with this. 4. There was no cross-examination of Mr Barney. The only challenge to his evidence was the affidavit of Mr Downey, who exhibited further correspondence, in particular, in respect of "further revised delivery programs", many of which it was said the Superintendent did not respond to. Mr Downey provided details of the text messages referred to at [52]. 5. There is no doubt that there is a substantial dispute between the contractor and the principal in respect of numerous issues. Given the size of the project and the amounts in issue, it will likely take some time for these disputes to be finally determined. Proceedings involving a claim on a performance bond or guarantee, however, do not involve a trial on the merits: FMT Aircraft and Gate Support Systems 8B v Sydney Ports Corporation [2010] NSWSC 1108 at [17] (per Pembroke J), followed in Patterson Building at [43]. 6. On this application, the quality of the evidence relied upon by the principal, effectively unchallenged, eclipses the somewhat cursory material provided by the contractor. I do not consider that there is a serious issue to be tried as to whether the principal was "acting reasonably" when it formed the view, based on the material then at hand, that the contractor was in substantial breach of the contract, entitling the principal to terminate for cause. The contractor's onus is not discharged. Renegotiation of surety arrangements 1. If I am wrong about this, it is necessary to consider the evidence relied upon in respect of balance of convenience. In parallel with the contractor's dealings with the principal, in July and August 2023, the contractor was negotiating bonding facilities from the surety market, specifically with Swiss RE International SE (or Assetinsure) via an intercreditor deed with the Commonwealth Bank. The state of these negotiations, and the impact of any call on the Unconditional Undertakings, was relied upon by the contractor in respect of the balance of convenience. 2. According to the contractor's group financial officer, Alister Berkeley, the contractor will be unable to continue to tender for new work and will be unable to enter into contracts for new work unless it continues to have the ability to provide bank guarantees and sureties to counterparties. The contractor has reached the capacity of the funding that the bank will offer and has spent four months negotiating bonding facilities from the surety market to enable the contractor to continue to tender for further work and enter future contracts. Mr Berkeley understands that these negotiations are close to being finalised by way of the intercreditor deed between the bank and a new financier. 3. The contractor tendered two folders of material, documenting these negotiations. By the end of August 2023, drafts of the intercreditor deed and a deed of priority between the bank and Assetinsure were in circulation. The bank raised commercial issues, including the contractor's compliance with its bank covenants. Mr Berkeley provided a compliance certificate for June 2023, noting that the interest coverage ratio (ICR) ratio was "right on the limit, but if we unlocked $10m in tied up cash it would go against the [overdraft] and the interest expense would be a lot less." The 2023 financial year was said to have been challenging, given wet weather conditions. 4. By 15 September 2023, Mr Berkeley reported "we have a stalemate". Assetinsure was not prepared to budge from an intercreditor standstill period of 45 days and had made it clear that they would "walk away" from the proposed transaction unless the period was in line with their other facilities. Email traffic between the bank, Assetinsure and the contractor's representatives suggest that the points of difference were not merely drafting, but commercial considerations. 5. The contractor's negotiations with the bank and Assetinsure in respect of the intercreditor deed appear to have remained in stalemate. On 11 October 2023, Mr Martinus emailed Assetinsure in "one last attempt" to get an agreeable intercreditor deed between Assetinsure and the bank. On 16 October 2023, Assetinsure provided its response, noting that it had yet to hear from the bank on "a number of other commercial points", but if the bank could confirm these matters with Mr Martinus, "then we can look into re-opening discussions on the intercreditor terms". The bank resumed communications. Efforts were made to arrange a meeting between the parties. On 3 November 2023, Assetinsure reminded Mr Martinus that it awaited to hear from the bank on a number of commercial points and sought confirmation on these points before the meeting "otherwise we will be covering old ground." On 8 November 2023, Assetinsure asked Mr Martinus to provide updated accounts for review "prior to progressing the discussions too much further". Balance of convenience 1. The contractor submitted that the balance of convenience weighed strongly in favour of this Court granting an interim measure in order to maintain the status quo until such time an arbitral panel could be appointed. Otherwise, the contractor's claim for the return of the Unconditional Undertakings would be rendered nugatory. The contractor submitted that there was a real risk that the incoming financier would lose confidence in the contractor and withdraw from the negotiations if a call was made on the Unconditional Undertakings. A call on the Unconditional Undertakings may cause reputational damage and have a negative impact upon its credit rating, increasing financing costs and/or restricting its ability to obtain financing. Should either occur, it would be very difficult for the contractor to prove, in monetary terms, the damage it has suffered, such that damages would not be an adequate remedy. Against this, the principal had not pointed to any specific prejudice that it would suffer if the existing restraint was extended. 2. The principal submitted that the contractor's evidence on this issue was far from compelling or detailed, where it had had two months to consider its evidentiary position. The intercreditor deed did not appear to have progressed since 25 September 2023. There was no evidence that the refinancing was likely to conclude imminently, despite a lengthy period of negotiation. The status quo is what the parties agreed as to which of them should bear the financial risk pending final determination, not the continuation of where that risk would naturally fall in the absence of a performance bond to call upon: Sugar Australia at [31]. Nor had the contractor identified any meaningful consequential impacts on its business beyond negotiations of an intercreditor deed. 3. The present status of the discussions between the contractor, the bank and Assetinsure in respect of the intersecurity deed is not known. I was asked to infer that failure to grant the relief sought would have the consequence that these negotiations would fail. Having reviewed two folders of communications between the negotiating parties, I draw no such inference. First, the issues which prevent the successful conclusion of these negotiations appear to be substantive commercial considerations. Second, the size of the existing and proposed facility suggest that a call on the unconditional undertakings is unlikely to faze the bank or Assetinsure if the commercial terms are otherwise acceptable. 4. The prejudice suffered when a bank guarantee is called on is the nature of the contractual bargain: Daewoo at [137]-[138]. I accept that a call on the Unconditional Undertakings may cause damage to the contractor's reputation: Lucas Stuart v Hemmes Hermitage Pty Ltd [2010] NSWCA 283 at [45] (per Macfarlan JA). However, it is open to the contractor to pay the amount of the undertakings and recover them later by way of damages plus interest if it is ultimately vindicated in arbitration: Siemens Gamesa Renewable Energy Pty Ltd v Bulgana Windfarm Pty Ltd [2019] VSCA 318 at [117]. 5. Whilst the principal did not point to any specific prejudice, the relevant prejudice suffered by the principal, should an interim measure be granted, is deprivation of the very promise that it bargained for, being the ability to hold the money the subject of the unconditional undertakings pending final resolution of the parties' dispute. Nor is there evidence to suggest that the principal will not be capable of repaying any moneys obtained by the Unconditional Undertakings, if it is established at arbitration that the principal is not entitled to retain such funds. Orders 1. For these reasons, I make the following orders: 1. Dismiss the summons filed on 25 September 2023 with costs. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 20 December 2023