Thiess Watkins (Construction) Limited v Canberra Permanent Co-Operative Building Society Limited [1986] ACTSC 93 (25 September 1986)

SUPREME COURT OF THE ACT

THIESS WATKINS (CONSTRUCTION) LIMITED v. CANBERRA PERMANENT CO-OPERATIVE
BUILDING SOCIETY LIMITED
S.C. No. 1541 of 1986
Building Contract - Injunction

COURT

IN THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Gallop J.(1)

CATCHWORDS

Building Contract - security provided by bank guarantee - money paid by bank to proprietor pursuant to document of guarantee - entitlement of proprietor to guarantee money.

Injunction - alleged breach of contract - damages an adequate remedy.

London and Blackwell Railway Co. v. Cross (1886) 31 ChD 354

HEARING

CANBERRA
25:9:1986

ORDER

The application for injunction be refused.

Otherwise the notice of motion dated 19 September 1986 be adjourned generally.

DECISION

On 18 September 1986 I made an order ex parte that until further order the defendant be restrained from presenting for payment or otherwise negotiating a cheque for $500,000 received from the Westpac Banking Corporation in Brisbane on 18 September 1986, being the proceeds of a bank guarantee provided by the plaintiff pursuant to clause 35 of a building agreement entered into between the parties on 19 July 1984. I adjourned the further hearing of the matter until 11.30 am on the next day and gave directions about the service of the documents upon the defendant.

2. When the matter came on for hearing on the next day I was informed by counsel for the plaintiff that at the time when I made the ex parte order late in the afternoon of 18 September 1986, the cheque referred to had already been presented for payment and paid by the Westpac Banking Corporation to the defendant. At the hearing on that day the defendant appeared and was represented by counsel.

3. I thereupon made an order vacating the injunction I had made the previous day. The plaintiff then moved for a further order pursuant to a notice of motion filed that day that the defendant repay to the plaintiff's banker the sum paid "by the said bank to the defendant pursuant to the defendant's demand or in the alternative" a declaration "that the defendant is obliged to pay the said sum to the plaintiff". That motion was opposed by the defendant and after hearing both counsel I reserved my decision.

4. The matter arises out of a building contract between the plaintiff and the defendant entered into on 19 July 1984 and relating to the construction of a large commercial enterprise in the City of Canberra. The plaintiff is the builder under the contract and the defendant is the proprietor. Pursuant to clause 35 of the building contract the plaintiff provided to the defendant by way of security two bank guarantees issued by Westpac Banking Corporation, Queen Street, Brisbane branch and dated 28 June 1984 in the sums of $200,000 and $500,000 respectively. The following facts were agreed:

(1) the plaintiff as builder has vacated the building

site as it claims to have completed all work under
the building agreement;
(2) the defendant contends that the plaintiff has
failed to complete the works pursuant to the said
agreement;
(3) all matters of dispute are to be referred to an
Arbitrator for determination;
(4) no Arbitrator has yet been appointed and no award
has been made by any such Arbitrator by way of
liquidated damages;
(5) the defendant intends to serve upon the plaintiff
a notice pursuant to clause 38 of the building
agreement notifying the plaintiff of the
defendant's intention to determine the employment
of the plaintiff under the building agreement and
detailing the default of the plaintiff relied upon
by the defendant.

The draft notice was in evidence as Exhibit A.

5. The relevant provisions of the building agreement are clauses 35 and 38 which are in the following terms:

"35. The Builder shall prior to the date of this
Agreement provide security by way of two (2) Bank
Guarantees in a form approved by the Proprietor in the
respective amounts specified in Items 7 and 8 of the
Schedule for the due performance of his obligations
under this Agreement and in respect thereto the
following provisions shall apply:-
(a) such Bank Guarantees shall be maintained effective
during the Contract Period, provided that the
Proprietor shall authorise the release of the Bank
Guarantee specified in -
(i) Item 8 of the Schedule, forthwith after the
Practical Completion Date, and
(ii) Item 7 of the Schedule, forthwith after the
expiration of the Contract Period,
in each case except to the extent to which the
Proprietor has had recourse thereto;
(b) recourse to the security provided by the Builder
in terms of this Agreement shall be available to
the Proprietor in the event of the Proprietor
being entitled to give a notice to the Builder
pursuant to the provisions of Clause 38 or if the
employment of the Builder is determined pursuant
to the provisions of clauses 39, 40 or 41;
(c) recourse to the security provided by the Builder
under the Bank Guarantee in the amount referred to
in Item 7 of the said Schedule shall be available
to the Proprietor in respect of any amount payable
by the Builder to the Proprietor pursuant to this
Agreement by way of Liquidated Damages PROVIDED
THAT:
(i) the Proprietor shall have first notified the
Builder of his intention to have recourse
thereto; and
(ii) the Builder shall have within 14 days of the
Proprietor having so notified the Builder
agreed thereto in writing or failing the
agreement of the Builder in writing and
either the Proprietor or the Builder having
referred the matter to arbitration pursuant
to the Arbitration Provisions, an arbitrator
shall have awarded Liquidated Damages to the
Proprietor and then only to the extent of
such award;
(d) if the Builder (not himself being then in breach
of this agreement) determines his employment
pursuant to the provisions of clauses 43 or 44
hereof the Proprietor shall, at the request of the
Builder, authorise the release of the Bank
Guarantees."
"38. If the Builder:-
(a) without reasonable cause, wholly suspends the
carrying out of the Works;
(b) fails to proceed with the Works regularly and
diligently;
(c) fails to proceed with the Works in a competent
manner;
(d) refuses or persistently neglects to comply with
written notice from the Proprietor requiring him
to remove defective work or improper materials or
goods; or
(e) otherwise is guilty of a substantial breach of the
provisions of this Agreement,

then in any such case the Proprietor may give to the
Builder by certified mail a written notice stating the
intention of the Proprietor to determine the employment
of the Builder under this Agreement and such notice
shall specify and (except for a default referred to in
paragraph (a) of this Clause) detail the default relied
upon."

6. Item 7 of the Schedule referred to in clause 35(a)(ii) is the first bank guarantee of $500,000 and it is that sum which has been paid by Westpac Banking Corporation to the defendant on demand by the defendant. The plaintiff contends that the defendant is not entitled to have recourse to the security provided by the plaintiff and seeks to restore what the plaintiff calls the status quo by an order that the defendant repay that sum to the plaintiff's bank, the Westpac Banking Corporation, or, alternatively, that the defendant pay the amount of $500,000 to the plaintiff pending determination of the issues between the parties under the building agreement.

7. It is necessary to set out the terms of the bank guarantee:

"At the request of WATKINS LIMITED (hereinafter called
'the builder') and in consideration of Canberra
Permanent Co-Operative Building Society Limited
(hereinafter called 'the Principal') accepting this
undertaking as security for performance due for release
at the expiration of the Contract Period - under a
Building Contract for construction of an Office
Development Section 10, City, Corner London Circuit and
Constitution Avenue, Canberra, A.C.T. entered into
between the Builder and the Principal the WESTPAC
BANKING CORPORATION (hereinafter called 'the Bank')
unconditionally undertakes to pay on demand any sum or
sums which may from time to time be demanded in writing
by the Principal to a maximum aggregate sum of FIVE
HUNDRED THOUSAND DOLLARS ($500,000.00).

This undertaking shall not be revocable by notice from
the Bank to the Principal and the Bank's liability
hereunder shall not be impaired or discharged by any
extension of time granted by the Principal to the
Builder for the performance of the said Contract or by
any variation or alteration at any time made by the
Principal and the Builder to the terms of the Contract
or by reason of the Principal giving its permission for
the Builder to proceed with any of the works or
services set out in the said Contract after default by
the Builder in the due performance of the said Contract
and notwithstanding that any such extension of time or
variation or permission was granted, made or given
without the consent or knowledge of the Bank.

8. This undertaking is to continue until:-

(a) The Bank receives written notification from the
Principal that this undertaking is no longer
required by the Principal, or
(b) Payment to the Principal by the Bank of the whole
of the said sum of FIVE HUNDRED THOUSAND DOLLARS
($500,000.00) (or such part as the Principal may
require as being in full satisfaction of this
undertaking), or
(c) This undertaking is returned to the Bank.
whichever shall first occur, and the liability of the
Bank shall thereupon immediately cease and determine.
Should the Bank be notified in writing purporting to be
signed by the Manager for and on behalf of the
Principal that the Principal desires payment to be made
of the whole or any part or parts of the said sum it is
unconditionally agreed that such payment or payments
will be made to the Principal forthwith without further
reference to the Builder and notwithstanding any notice
by the Builder to the Bank not to pay same.
NOTWITHSTANDING anything hereinbefore contained the
Bank may at any time without being required so to do
pay to the Principal the sum of FIVE HUNDRED THOUSAND
DOLLARS ($500,000.00), less any amount or amounts it
may previously have paid under this undertaking or such
lesser sum as may be required and specified by the
Principal as being in full satisfaction of this
undertaking and thereupon the liability of the Bank
hereunder shall immediately cease and determine."

It is to be noted that the guarantee is expressed to be "as security for performance due" and that the amount referred to therein is payable on demand by the bank to the defendant.

9. The defendant contends that it is entitled to give a notice to the plaintiff pursuant to the provisions of clause 38 of the agreement and by that circumstance it was entitled to have recourse to the bank guarantee. In my view, the entitlement of the defendant to have recourse to the bank guarantee falls to be determined on the construction of the building agreement and of clause 35 in particular. It provides that the builder shall, prior to the date of the agreement, provide security by way of two bank guarantees. Sub-clause (a) then provides that the guarantees shall be maintained effective during the contract period, provided that the proprietor shall authorise the release of the respective guarantees at the times specified therein. Sub-clauses (b) and (c) deal with the builder having recourse to the security when any one of a number of events should arise. They all are quite disparate events:

(1) when the proprietor is entitled to give a notice
to the builder pursuant to the provisions of
clause 38 (see sub-clause (b));
(2) when the employment of the builder is determined
pursuant to the provisions of clauses 39, 40 or 41
(sub-clause (b)). Clause 39 deals with the
determination by the proprietor for the builder's
failure to remedy any default given by notice
under clause 38. Clause 40 deals with the
builder's bankruptcy; and clause 41 deals with the
builder's deregistration or loss of licence.
(3) when liquidated damages shall have been agreed or
assessed as being payable by the builder to the
proprietor. Sub-clause (c)(i) provides a
machinery whereby those liquidated damages may be
agreed. The proprietor may notify the builder of
his intention to have recourse to the guarantee
and the builder can then, having been notified,
agree that the builder may have recourse to the
guarantee. Alternatively, under sub-clause
(c)(ii) the recourse to the guarantee abides the
award of an arbitrator and the recourse may only
be had to the extent of the arbitrator's award.
As a matter of construction, the present defendant

may have recourse to the bank guarantee referred to in Item 7 of the Schedule to the building agreement if the first event set out above has occurred i.e. it is "entitled to give a notice" to the plaintiff pursuant to the provisions of clause 38. Those words cannot, in my view, mean that the proprietor has to wait until his entitlement to give a notice pursuant to clause 38 has been determined in some legal proceedings between the parties.

10. The arguments advanced in support of an order in favour of the plaintiff are very similar, if not identical, to those which were rejected by the High Court in Wood Hall Limited v. The Pipeline Authority [1979] HCA 21; (1979) 141 CLR 443. The High Court there entertained an argument that whether the bank was bound to make payment under the guarantees depended upon a further question whether the defendant in that case had the right as against the plaintiff contractor to demand payment from the bank or, to put the matter in another way, whether the action of the defendant in making the demand upon the bank constituted a breach of its contract with the contractor. The argument was rejected, basically because of the terms of the bank guarantee. As in this case, the bank "unconditionally" undertook "to pay on demand" the sum guaranteed up to the limit specified in the bank guarantee. Gibbs J., as he then was, said that to hold that the bank guarantees were conditional upon the making of a demand that conformed to the requirements of the contract between the defendant and the contractor would have been quite inconsistent with the express statement in the bank guarantees that the undertaking of the bank was unconditional.

11. Each case, of course, depends upon its own facts, but in my view the High Court has provided a useful guide to the way in which bank guarantees such as is now under consideration are to be construed. In the instant case the defendant was entitled to demand payment when it did under the bank guarantee expressed to be "as security for performance due"; furthermore, it was entitled to make the demand as against the plaintiff when it regarded itself as "entitled to give a notice to the builder pursuant to the provisions of clause 38". It did not have to wait until that entitlement was determined by some appropriate proceedings. If, of course, it turns out that it was not so entitled, because, for instance, there has been no default on the part of the plaintiff as alleged in the intended notice pursuant to clause 38, then the remedy to the plaintiff is damages.

12. It was put on behalf of the plaintiff that an injunction is the appropriate remedy, because, unless the injunction is granted, the plaintiff will incur interest to its bank under the bank guarantee. That is obviously so but "the very first principle of injunction law is that prima facie you do not obtain injunctions to restrain actionable wrongs for which damages are the proper remedy" (per Lindley L.J. in London and Blackwell Railway Co. v. Cross (1886) 31 ChD 354 at 369).

13. Counsel did not put any submission that damages would be an inadequate remedy if the defendant has acted in breach of the building agreement. In the circumstances I am not persuaded that if the defendant is in breach the plaintiff cannot be adequately compensated in damages. For these reasons the application is refused, otherwise the notice of motion dated 19 September 1986 is adjourned generally.