Calling it in: Federal Court Affirms Principal’s Right to Call on Unconditional Undertakings

2 February 2012

In Redline Contracting Pty Ltd v MCC Mining (Western Australia) Pty Ltd (No 2) [2012] FCA 1, the Federal Court considered an application by Redline for an interim injunction to restrain MCC from calling on a series of unconditional undertakings provided by Swiss Re on Redline’s behalf. The undertakings had been provided to MCC in accordance with a requirement of the pipeline construction contract between it and Redline.

Redline concentrated on the wording of clause 5.2 of the contract, which provided that a call on the undertakings could be made where a sum was “unpaid after the time for payment”. It argued that these words effectively meant that MCC was only able to call on the undertakings to the extent that there was a sum ‘due and payable’. Redline contended that as MCC was seeking to use the undertakings to compensate it against damages which were not yet quantified and had not been the subject of any final determination, there was no sum ‘due and payable’ and thus MCC was not entitled to call on the undertakings.

Siopis J rejected Redline’s interpretation of clause 5.2, holding that the Court would likely find at trial that the clause represented an allocation of risk between the parties as to which party bears the risk of being out of pocket pending determination of the parties’ dispute. Accordingly, the fact that the damages claim was unliquidated was not a bar to calling upon the undertaking, particularly in circumstances where MCC bona fide believed that it had such a claim.

Redline also argued that MCC’s call on the undertakings was unconscionable conduct in breach of s 51AA of the Trade Practices Act 1974 (Cth) (now s 20 of the Australian Consumer Law). Redline relied on a number of grounds, including that the sums claimed by MCC were not and may never be due, that the call on the undertakings would cause reputational harm to Redline and that MCC’s call was made with the ulterior purpose of putting commercial pressure on Redline to settle. These arguments were also unsuccessful, with his Honour finding that MCC was doing no more than exercising its contractual rights. Moreover, given the commercial purpose of the undertakings, and in the absence of bad faith, considerations of unconscionability were not relevant. Finally, his Honour noted that if Redline was concerned about the reputational harm it would suffer by a call on the undertakings, it could have protected itself by concluding a contract with greater limitations on the circumstances in which a call could be made.

The full decision can be viewed in full here.