Security | Renew Legal

Calling on bank guarantees and injunctions

Renew Legal specialises in renewables, construction, engineering and technology projects

July 2024

The holder of security under a construction contract must be aware that a call on the security could result in litigation if the contractor becomes aware a call is to be made, or has been made.

To be granted an injunction (an interim measure to stop something being done), an applicant must establish:

There is a prima facie case that there is a serious question to be tried and a sufficient likelihood of success at trial;

If an injunction is not granted, the applicant is likely to suffer injury for which monetary damages will not be an adequate remedy; and

That the balance of convenience favours the granting of an injunction.

The procedure for an injunction is an application (usually oral and urgent) which, if granted, will provide for a short period during which time the applicant must institute formal proceedings articulating all final relief, and put on material before the judge to substantiate the interim grant and justify an extension on an interlocutory basis.

Before a call is made, the party making the call should ensure that they strictly comply with the terms of the contract and any formal requirement of the security.

The terms of a guarantee will often not state when the guarantor must make payment. Banks have been known to make enquiries with the customer before paying. This should be resisted, if possible, because any delay and/or notification could lead to an injunction application being made.

If a litigious contractor becomes aware of the call, there are three possibilities:

The bank has not yet paid: the contractor could seek an order restraining or enjoining the principal from making the demand;

A representative of the principal is at the bank waiting to be paid: an application to injunct the bank from paying on an irrevocable and unconditional bank guarantee is unlikely to succeed. The exceptions to this are fraud, unconscionability and breach of a negative stipulation in the underlying contract;

The bank has paid: the contractor may seek an injunction to prevent the principal from dealing with the proceeds.

Whichever outcome, the question for the court is whether the beneficiary (the principal) should have access to the security before the dispute has been resolved. If there is a valid dispute under the contract about whether the entitlement to call has crystallised (for example, due to force majeure pushing out dates), this may be persuasive to a court in an injunction application even though it is in conflict with the nature and intent of an unconditional bank guarantee.

A common argument is for a contractor to claim that it will suffer reputational harm if the security is called upon: Austrak v John Holland Pty Ltd [2008] QSC 103; Barclay Mowlem Construction Ltd v Simon Engineering (Australia) Pty Ltd (1991) 23 NSW 451. Newer authorities, however, indicate that damage to a contractor’s reputation should be rejected as a factor in weighing the balance of convenience because:

It undermines the purpose of the performance guarantee provision: Sugar Australia Pty Ltd v LendLease Services Pty Ltd [2015] VSCA 98, [232]-[233]’

It is a risk of doing business in the “commercially aggressive world of international construction contracting”: Laing O’Rourke Australian Construction Pty Ltd v Samsung C&T Corporation [2016] WASC 49, [156];

Disputes are commonly part and parcel of construction contracts: Duro Felguera Australia Pty Ltd v Samsung C&T Corporation [2016] WASC 119, [77]; and

The contractor can avoid reputational damage by paying the relevant amount: Saipem Australia Pty Ltd v GLNG Operations Pty Ltd [2017] QSC 294, [36], [44].

Further complications arise in Queensland

Parties wishing to call on performance security under a Queensland construction contract be aware of their obligations under the Queensland Building and Construction Commission Act 1991 (Qld) in relation to claims for delay liquidated damages for a contractor’s failure to achieve completion by the date for completion.

In Queensland, a principal must give a contractor notice of its proposed use of the security and of the amount owed within 28 days after it becomes aware of its right to use it, or in this case, when it becomes aware of its right to obtain the liquidated damages. The 28 day period starts on the date the completion certificate is issued because that is the date that the security holder becomes aware that it is has the right to obtain the amount owed.

In Saipem Australia Pty Ltd v GLNG Operations Pty Ltd (No 2) [2015] QSC 173, the Court said at [40] that:

“the 28 day period which is relevant under s 67J [did] not commence from an awareness that something would have to be paid to the contracting party … [rather]… until the Practical Completion Certificate was issued, the obligation to pay liquidated damages until cl 35(a) had not arisen. Until then there was no (relevant) “amount owed” by, or “debt due” from Saipem.”

In Multiplex Ltd v Qantas Airways Ltd [2006] QCA 337, [34] (with which Saipem, Watpac Australia Pty Ltd v Spring Hill Developments (No 1) [2006] QSC 269, and Vos Construction & Joinery (Qld) Pty Ltd v Sanctuary Properties Pty Ltd [2007] QSC 332 are consistent) the Court of Appeal held that “the 28 days referred to in s 67J(2) does not begin to run until a time after the right of the owner to recover some amount from the builder has actually accrued”.

The Act speaks of the owners awareness of its “right to obtain the amount owed”, not of its “potential right” or “its right in the future to obtain the amount owed”.

Form requirements of a call

In Santos Limited v BNP Paribas [2019] QCA 11, the Court of Appeal found that a letter of demand for $55 million under a bank guarantee was invalid because Santos failed to execute the letter of demand in accordance with the prescribed form.

BNP had issued a bank guarantee as performance security for a contractor, Fluor Australia Pty Ltd, in providing engineering and design service to Santos. Santos sent a letter of demand to BNP requesting payment of $55 million.

The bank guarantee stipulated that BNP Paribas was obliged to pay Santos if BNP Paribas received a letter of demand “in the form of the letter attached to this Bank Guarantee (amended as applicable) purporting to be signed by an authorised representative of the Beneficiary”. In the draft form letter annexed to the bank guarantee, the words “Authorised signatory of Santos Limited” appeared below the sender’s signature.

Santos’ letter of demand was signed by a General Manager, with the company name and his title below his signature, but the words “Authorised signatory of Santos Limited” were not included.

BNP refused to pay on the grounds that the letter of demand did not comply with the form of the draft letter annexed to the bank guarantee and Santos was unable to issue a new demand because the bank guarantee had expired.

A requirement of the bank guarantee was that the demand purport to be signed by an authorised representative. The trial judge found that “purporting” was synonymous with “representing”. Santos argued that “purporting” means that a representation of authority appears, not proof of actual authority. However the Court of Appeal noted that “purporting” may also cover a general holding out as having authority. Greater weight was placed on the requirement that the notice be in the form attached to the bank guarantee and the Court found that “purporting” required the additional words evidencing the signatory’s authority.

The Court of Appeal upheld the trial judge’s reasoning that the Santos letter of demand did not trigger BNPs’ obligation to pay. The Court noted that the form requirements in the bank guarantee “relieves the issuer of the necessity to look beyond whether the party making the demand has met the stipulations of the bank guarantee”. The Court considered that the demand must contain the “essential features of the draft letter” compared with non-essential elements such as the formula of “yours faithfully” or “yours sincerely”.

In invalid demand may be cured by the re-issue of a compliant demand: AES-3C Maritza East 1 Food v Credit Agricole Corporate and Investment Bank [2011] EWHC 123; Sea-Cargo Skips AS v State Bank of India [2013] EWHC 177. However, in practice, demands on security are often made just prior to expiry as a last resort and it may not be possible to re-issue as was the case in Santos as the bond had expired.

This was a timely (and costly) reminder that both principal and contractor should pay close attention to whether there is an entitlement to make a call, and the exact form of the demand being made, when dealing with contract security.

This article is a summary and general overview of matters of interest. It is not comprehensive and does not constitute legal advice.

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