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Bank Guarantees: Court confirms meaning of 'payable'

The Court of Appeal of Western Australia recently considered the ability of a subcontractor to prevent recourse to bank guarantees to recover liquidated damages, when the underlying entitlement to the liquidated damages was the subject of dispute between the parties.

In CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [No 2] [2017] WASCA 123, JKC Australia (the Head Contractor) asserted its right to liquidated damages from CPB (the Subcontractor) after the Subcontractor allegedly failed to achieve milestone dates in relation to the Icthys LNG Project in Western Australia.

Under the contract, the Subcontractor was required to provide bank guarantees in favour of the Head Contractor. The relevant clause (General Condition (GC) 35.3) stated:

(a) Contractor may have recourse to the Bank Guarantee(s) at any time
      in order to recover any amounts that are payable by Subcontractor
      to Contractor on demand.
(b) Subcontractor waives any right that it may have to obtain an 
      injunction or any other remedy or right against any party in respect 
      of Contractor having recourse to the Bank Guarantee(s).

The Subcontractor sought to prevent recourse to the bank guarantees on the basis that the word ‘payable’, in clause GC 35.3(a), required an objective determination of the Head Contractor’s claim pursuant to the dispute resolution mechanism in the contract.

In determining the issue, the Court of Appeal held that, on the proper interpretation of GC 35.3(a), the Head Contractor was entitled to have recourse to the bank guarantees if at any time the Head Contractor had an honest (bona fide) claim, in the events that had happened, to immediate payments under the contract.

In reaching this position the Court found that the interpretation advanced by the Subcontractor would defeat the purpose of the guarantees being ‘on demand’. Rather, the Court observed that the purpose of GC 35.3(a) was for the Contractor to be in the money to the extent of the bank guarantees, pending resolution of any dispute. Accordingly, the appeal was dismissed by the Court.

The Court also considered GC 35.3(b), finding that on its proper construction, the clause operated as a waiver of the Subcontractor’s right to relief as to prospective recourse to the Bank Guarantees. The Court held that it was unnecessary to determine if the clause was an ouster of the Court’s jurisdiction, but held that GC 35.3(b) was relevant to the interpretation of GC 35.3(a), and supported the proper interpretation of GC 35.3(a).

The appeal decision can be found here.

The Subcontractor has applied for special leave to the High Court to appeal the decision.

© MolinoCahill Lawyers Pty Ltd